Investment, unlike consumption, satisfies no immediate want. The businessman putting his money today is basically taking a bet on the future, when it would start yielding returns. Such bets are a function of the “state of confidence” at the time of investment. The investor has to be reasonably, if not absolutely, certain about the prospective yields — again based on today’s knowledge of tomorrow.
The longer the time horizon, the more uncertain is the above knowledge. As John Maynard Keynes famously wrote, “our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing”.
India’s current economic slowdown is showing because of consumption spending clearly falling, be it on cars or Rs 5 biscuit packs. But the crisis goes back longer, from the time companies stopped investing. Investment is what creates jobs and incomes. These, then, get spent and go into the pockets of others, who, in turn, fuel further consumption and income generation. As this flow of incomes from hand to hand expands the market, the “state of confidence” for businessmen to invest also goes up, reinforcing the virtuous cycle.
A good indicator of “state of confidence” is new investment proposals. Their value, according to the Centre for Monitoring Indian Economy, fell from Rs 20 lakh crore in 2015-16, to Rs 16.2 lakh crore, Rs 11.4 lakh crore and Rs 10 lakh crore in the following three fiscals. During April-June this year, new projects announced (not all get off the ground) amounted to a mere Rs 74,000 crore, against Rs 3,45,000 crore in the same quarter of 2018-19.
The stalling of the growth engine, in other words, started from around 2015-16. The accompanying chart shows that business confidence did revive in the initial two years of the Narendra Modi-led government, even if the new project proposals may not have scaled the “animal spirits” levels from 2006-07 to 2010-11. Subsequently, though, there has been a steep drop, with the new investment announcements in 2018-19 below even those during the last two UPA years of 2012-13 and 2013-14. The low investor confidence has spilled over now to consumers as well. When investments dry up and people see no new jobs being created, with existing employees also getting laid off, their confidence to spend takes a knock. The slowdown, thus, becomes visible and the earlier virtuous cycle is replaced with a vicious downward spiral of contraction in consumer spending, incomes, jobs and investment.
Fixing this mess, as Chief Economic Adviser Krishnamurthy Subramanian points out, cannot happen through consumption. Consumers will not spend unless they feel confident about jobs and incomes; the government’s prodding banks to reduce interest rates is unlikely to make them take loans to buy homes or vehicles. Reviving the investment cycle is what the economy desperately needs.
But the question to ask is: Who will invest? Investment, as already noted, is a function of confidence about prospective yields from capital expenditures incurred today. Entrepreneurs make their investment decisions based on long-term expectations — and these are often formed by simply taking the existing situation and projecting it to the future.
Suzuki, in 2017, opened its third five-lakh-cars-per-annum plant in India. Would it have commissioned this — on top of Maruti Suzuki’s Gurugram and Manesar facilities in Haryana that can together produce 15.8 lakh units — in 1997? The answer is no. Any investment is limited by the size of the market it caters to. The time horizon of investors – including Japanese firms known for their long-range planning – is rarely more than ten years. In 1997, Maruti had an installed capacity of just 2.5 lakh vehicles. Even if Suzuki knew that the Indian passenger vehicle market was to grow to 30 lakh-plus units two decades later, the Hansalpur plant would have got built in 2017, not 1997. The Manesar unit, too, came up only in 2007, when the market was “seen” to have expanded enough at that point in time.
In the current situation — where “animal spirits” have swung from the spontaneous optimism of 2006-11 and 2014-16, to extreme risk aversion — the private sector is unlikely to commit to any significant investment for a considerable period. It would require somebody else with a truly long-term investment time horizon, then, to take up the slack. That somebody, who is oblivious to yields or would not extrapolate these from the prevailing situation, can only be the government/public sector.
Consider China. In 1990, its annual per capita GDP, at $318, was lower than India’s $368, as per World Bank data. But cut to 2018, China’s per capita of $9,771 was nearly five times India’s $ 2,016. This happened on the back of an investment-driven growth model, which even Subramanian’s Economy Survey for 2018-19 has highlighted. What it does not, however, capture is the role of state-owned enterprises that invested heavily — whether in aluminum smelters and steel mills, empty airports and bullet trains, ghost towns and highways to nowhere, or in developing a homegrown telecom equipment and semiconductor industry — as part of an almost deliberate strategy to create excess capacity. Only they, not private enterprise, could have done that over an extended period, by which time China’s GDP had soared from $361 billion to $13.6 trillion (India’s has gone up from $321 billion to $2.7 trillion between 1990 and 2018).
India can definitely do with more public investment, especially in the given situation. But there are three major issues here. The first is, of course, resources: Can, and will, the government risk a further slippage in its fiscal deficit targets? The second has to do with state capacity: Do public sector undertakings have the necessary project execution ability and managers of the calibre of a K L Rao, E Sreedharan or Verghese Kurien today? Third, even assuming they have, are there enough shovel-ready projects, with land acquisition and statutory clearances complete, that can be taken up for immediate execution? There’s probably not much time left to debate.