Dubai: Heightened uncertainty in India regarding the future course of broader economic policies and deteriorating business confidence have played a significant role in the recent investment slowdown, a study has shown.
An IMF working paper by Rahul Anand and Volodymyr Tulin, Disentangling India’s Investment Slowdown (a copy of which was obtained by Gulf News), notes how India’s growth has slowed substantially, after being strong both before and after the global financial crisis. Real gross domestic product (GDP) growth fell to 4 per cent in the second quarter of 2013-14, from an average of 9 per cent during 2009-10 and 2010-11. “Weak private investment is the main culprit,” the paper states.
Gross fixed capital formation, which grew by over 15 per cent annually before the 2008 and buoyed growth to an annual average of 8 per cent in 2003-04 till 2007-08, increased only by 1 per cent in 2012-13. “Furthermore, forward-looking data on investment project announcements suggests anaemic new capital investment and surging delays in implementation of ongoing investment projects, thus pointing to a subdued near-term investment outlook,” the report states.
The paper details how the marked acceleration in economic growth experienced in the years preceding the global financial crisis was tied to a surge in investment activity. Gross fixed investments as a share of GDP rose from an average of about 24 per cent during 1996-97 to 2003-04 to a peak of nearly 34 per cent in the second quarter of 2008. However, the growth and investment outlook changed dramatically with the arrival of the global financial crisis, with the investment-to-GDP ratio declining sharply to about 30 per cent in 2011-12. “Moderation in investment activity was accompanied by a gradual decline in the value of newly announced investment projects from an average of 10 per cent of GDP in 2006-07 to just 1 per cent in 2012-13,” the paper notes. Furthermore, the share of stalled and shelved investments jumped to over 2.5 per cent of annual GDP in mid-2011 after moderating slightly following a spike in early-2009. “As the share of stalled projects remains elevated, and the pipeline of new projects is exceptionally thin, concerns about India’s growth outlook remain,” the writers note.
They previous studies conducted by IMF peers which have noted similar issues. Tokuoka K., in a paper entitled “Does the Business Environment Affect Corporate Investment in India?” in 2012, suggests that improving the business environment by reducing costs of doing business, deepening the financial system, and developing infrastructure, could stimulate corporate investment.
The IMF’s 2013 staff report on India argues that several causes of weaker growth seem to be of a supply-side nature. “In particular, high profile tax policy decisions announced in the 2012-13 Budget have reduced foreign investors’ interest in India, while the increasing difficulty of obtaining land use and environmental permits have raised regulatory uncertainty for infrastructure and other large-scale projects. As a reaction to high-profile governance scandals, project approvals, clearances, and implementation have slowed sharply. Supply bottlenecks are particularly pronounced in mining and power, with attendant consequences for the broader economy, especially manufacturing,” the report stated.
In the short term, lowering nominal interest rates may provide some relief in terms of a reduced interest burden, especially to corporates with high leverage. However, in the medium term, lower rates with little slack in the economy would stoke inflation further and exacerbate inflation trends across sectors, hurting investment. In addition, simply lowering nominal rates without tackling deep structural issues is unlikely to lead to a sustainable revival of investments. “Continued progress on structural reforms and resolving supply side bottlenecks, therefore, remain critical to shore up confidence and revitalise investments and economic growth,” the report concludes.
