As India's investment rate is estimated to decline this financial year, industry chamber CII has asked Finance Minister Pranab Mukherjee to give a boost to investments in the forthcoming Budget, but economists believe a rollback of stimulus may continue. Economists said a decline in gross fixed capital formation as a percentage of gross domestic product (GDP) signified that businesses were postponing their investments to some extent due to interest rate tightening and procedural bottlenecks, but not shelving the projects.
However, a sharp plunge in industrial growth to a 20-month low of 1.6 per cent in December magnified the amount of such postponement and concealed the improvement in monthly factory production, they said.
The gross fixed capital formation (GFCF) as a percentage of GDP is estimated to have declined to 29.3 per cent this financial year from 30.8 per cent a year ago. It also stood at over 30 per cent in the previous three years (see chart).
"The Union Budget 2011-12 would have to explore many options to see that growth of the economy remains robust next year and beyond. Emerging challenges such as rising input costs and interest rates amid still subdued global demand will have to be dealt with," CII Director General Chandrajit Banerjee said.
The chamber said the policy instruments available to the government in the form of direct taxes could go a long way in overcoming the challenges facing the economy.
The urgent need, according to it, was to boost investments in agriculture, infrastructure and industrial sectors.
However, Yes Bank chief economist Shubhada Rao said, "on the fiscal front, the partial rollback of stimulus in the last Budget is likely to be carried forward in the forthcoming Budget."
The Budget for 2010-11 had partially rolled back excise duty by 2 per cent to 10 per cent.
The government had provided a series of stimulus by cutting excise duty by six per cent to eight per cent and service tax by two per cent to 10 per cent and stepping up public expenditure when Indian economy was hit by the ripple effects of the global financial crisis from the middle of September 2008, when US financial services major Lehman Brothers collapsed.
Rao added that GFCF turned a corner after the Lehman crisis. The fall was also reflected in a decline in the inward FDI-to-GDP ratio after 2008-09.
Rising interest rates, she said, was only partially responsible for this since FDI numbers were not affected by it and they too were declining compared to GDP. She blamed absence of a structural fiscal support, like not being able to implement Direct Taxes Code and GST, for this.
Crisil chief economist D K Joshi said interest rates was only one of the factors for declining the GFCF rate. Anyway, the effect of rising interest rates would be more pronounced in the next financial year, he added.
"Investment decisions get postponed, not shelved. Investment is also a function of procedures," he said.
Chief Statistician T C A Anant said the drop in gross fixed capital formation did not signify a slowdown in capital investment in the economy.
"One thing that needs to kept in mind is that the fall is largely because of a high base last year and not because of credit squeeze or something like that," he added.
Even as GDP numbers were revised up for 2009-10, gross fixed capital formation was revised down to Rs 20.16 lakh crore from earlier estimates of 20.19 lakh crore. In terms of proportion of GDP, the fall was much sharper to 30.8 per cent from earlier estimates of 32.4 per cent.
To a query whether the plunge in IIP growth in December signified industrial stagnation, Rao said, "the moderation though evident, conceals the relative improvement in sequential month-on-month movement."
December usually tends to be a strong month for IIP growth as production picks up after the Diwali lull and pre-New Year sales, she said, adding growth in December fares better than past historical trend.
"This corroborates the view that December growth is not as dismal as may look on a first glance, certainly not an indication of growth collapsing."
Even as the annual industrial growth in December slowed down to 1.6 per cent compared to 3.6 per cent in November, the numbers bear statistical illusion because of a high base of 18 per cent growth last December. Monthly industrial growth, in fact, stood at 10.25 per cent in December.
Joshi said, "I don't see investment collapsing. It is getting postponed."
