By Priyanka Venkat
It is common knowledge that a growth in investment is crucial to ensuring sustainable economic growth. Investment took a hit post demonetisation, and recent data suggest a pick up in investment in the second half of 2017-18.
Investment set to grow in second half
As per the first Advance Estimate of national income for 2017-18, investment is expected to grow by 5.9% in the second half. This is higher than the 3.1% growth seen in the first half. This will take the annual growth in investment to 4.5%.
Gross Fixed Capital Formation (GFCF) is expected to be about 29% of Gross Domestic Product (GDP) in 2017-18. To put it simply, GFCF refers to the increase in net fixed capital and is often used to represent the total investment in the country. The estimated GFCF for 2017-18 is lower than the 29.4% that was seen in April-September. The fall in the overall GFCF rate shows that the investment rate is likely to be less than 29% in the second half.
Reasons for the fall in GFCF
A part of the reason behind the fall in total investment could be the fall in household investment. Let’s start with the basics. Who do households include? In addition to individuals, households also include enterprises that are not government or corporates such as farms and non- farm businesses. They also include sole proprietorships, non-profit organisations, and partnerships.
Households largely drive both consumption and investment in the country. To put this in perspective, data released by the World Bank in 2016 showed that, consumption by households accounted for 59.4% of GDP, while government consumption i.e. expenditure accounted for only 11.65%. The amount of investment is dependent on the amount of savings, as households invest from their savings. According to NITI Aayog, total savings in the economy amounted to 32.5% of GDP, out of which, household savings amounted to 23.6%.
Households invest in both physical and financial assets. Physical assets include gold, real estate, precious metals and the like. Financial assets refer to financial instruments like debentures, equity, fixed deposits and investments in mutual funds. Household savings and investment have been diminishing. In 2015-16 the household savings rate as a percentage of GDP fell to 19% from 23.6% in 2011-12. Moreover, over the same period, household investment fell from 16.3% to 10.9%. The imbalance between savings and investment for households rose to 8.1% from 7.3%, which shows that even as savings and investments are falling, households are saving more than investing. Another point to note is that household savings are being invested in more financial assets than physical assets.
Certain physical assets like real estate and property can fuel growth. For instance, investing in real estate could lead to more construction activities, which in turn could increase the demand for paint, cement and so on. A sharp fall in investment in physical assets could lead to a slowdown in construction activities, the effect of which extends to other sectors as well. This often translates into a reduced capacity utilization problem that deters further investment. While investment in financial assets has risen, it is more than offset by the fall in investment in physical assets. As a result, there is an overall fall in savings and investment. Thus for a recovery in overall investment and growth, there is a dire need for an increase in savings and consequently investment by households.
Overall investment less likely to improve in 2017-18
Considering that the investment is likely to stay under 29% in the second half, it is not expected to revive like GDP did in the last two quarters. Credit Analysis and Research Limited (CARE ratings), in its report on the Advance Estimate, said- “Investments are unlikely to see an improvement. Only a gradual pick-up is foreseen.” Thus, the question of growth in investments is more of a wait and watch situation, and only time will tell whether it will make a rebound by the end of the financial year.
Featured Image Source: Pexels
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