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t is not the downward revision in overall GDP growth from 6.9 to 6.5 per cent — or the even more dismal fourth-quarter figure of 5.3 per cent — that is the most significant takeaway from the revised estimates of national income for 2011-12 released on Thursday. The greater worry is the shortfall in how much of that national income was ploughed back to augment the productive capacity of the economy – more specifically, the investment or gross fixed capital formation (GFCF) rate. That has fallen to 29.5 per cent of GDP at current prices, the first time it has gone below 30 per cent since 2004-05. There is a lot to be read into it. Throughout the nineties, the investment rate in the Indian economy languished at sub-25 per cent levels. The middle of the last decade saw the GFCF-GDP ratio surpass 30 per cent and reach almost touch 33 per cent in 2007-08. That was at the peak of the India Growth story, when a 35-40 per cent investment rate similar to those achieved by the East Asian tigers, if not China, seemed eminently achievable. The fact that we have now not just come off those peaks, but are virtually back to where we were in the nineties, is a story in itself. A story of missed opportunities, largely to do with indecisiveness and policy paralysis in the Government, which has, in turn, dampened investor sentiment.
The slowdown in investment is much more serious than a mere decline in growth rates of output in the economy. Without the former, there can be no new jobs nor any increase in productive capacity that holds the key to future growth. Unlike in 2007-08, companies today aren't investing simply because they are afraid of frequent policy shifts or new conditions being laid when a project has proceeded midway. The Government, on its part, has done little to allay these apprehensions. On the contrary, faced with mounting allegations of corruption and scams, it has withdrawn into a shell and lost the stomach to take any decision posing the slightest political risk. With official negativism and low business confidence feeding into each other, the results have been predictable. The best indicator of it is GFCF, which has registered a measly average year-on-year growth of 1.7 per cent in real terms during the last two quarters.
The onus of breaking the above downward spiral lies primarily with the Government. The recent move to grant forest clearance for two coal blocks that was holding up execution of some 6,000 MW of fresh power capacities is, hopefully, a sign of it finally waking up from a long slumber. But clearly, much more – that would offer credible evidence of the Government's commitment to reforms and fiscal prudence – is needed for reviving the ‘animal spirits' of entrepreneurs to goad them into investing again.