Arguing that investment slowdowns are more detrimental to growth than saving slowdowns, the Economic Survey 2017-18 says that the government’s policy priority must focus on reviving investment.
The Survey notes that India’s investment slowdown, which is in the works for past eight years, is not over yet and its reversal is key for the country to come back to 8-10 per cent growth trajectory.
A one percentage point fall in investment rate is expected to dent growth by 0.4-0.7 percentage points, it said. The Survey said the increase in India’s savings and investment rate was unusual in the last decade, in contrast to the prolonged decline from the peak level.
Cross country experience shows that “investment slowdowns have an impact on growth but not necessarily saving. Another (finding) is that recoveries from investment slowdowns, especially those associated with balance sheet difficulties–as in India–tend to be slow. Notably, mean reversion or some degree of automatic bounce-back is absent so that the deeper the slowdown, the slower and shallower the recovery,” the Survey said.
The policy conclusion is urgent prioritization of investment revival to arrest more lasting growth impacts, as the government has done with plans for resolution of bad debts and recapitalization of public sector banks, it noted. Coming few days ahead of the Union Budget 2018-19 to be presented on February 1, the annual report card of the economy indicates that the government may take significant steps to boost investments
“India’s investments and savings slowdown is unusual, it has now gone on for too long,” Chief Economic Adviser Arvind Subramanian said at a press briefing after the Survey was tabled in Parliament on Monday. “It is much more urgent and important to re-ignite investments than savings,” he said.
The ratio of gross fixed capital formation to Gross Domestic Product or GDP climbed from 26.5 percent in 2003, reached a peak of 35.6 percent in 2007, and then slid back to 26.4 percent in 2017. The ratio of domestic saving to GDP has registered a similar evolution, rising from 29.2 percent in 2003 to a peak of 38.3 percent in 2007, before falling back to 29 percent in 2016.
Fall in investment is mainly due to the decline in private investment. “Based on the break-up of investment and saving, that is available up to 2015-16, private investment accounts for 5 percentage points out of the 6.3 percentage point overall investment decline over 2007-08 and 2015-16. The
fall in saving, by about 8 percentage points over the same period, has been driven almost equally by a fall in household and public saving. The fall in household saving has in turn been driven by a fall in physical saving, partly offset by an increase in the holding of financial assets.”
“Policy priorities over the short-run must focus on reviving investment. Mobilizing saving, for example via attempts to unearth black money and encouraging the conversion of gold into financial saving or even courting foreign saving are, to paraphrase John Maynard Keynes, important but perhaps not as urgent as reviving investment,” it said.
India’s investment decline seems particularly difficult to reverse, partly because it stems from balance sheet stress and partly because it has been usually large. But some countries in similar circumstances have had fairly strong recoveries, suggesting that policy action can decisively improve the outlook, it said.