By Sarah Watson —
The release of the Central Statistical Office’s (CSO) quarterly report on the Indian economy sparked much concern over slower-than-expected growth in the fourth quarter of the 2016-17 financial year. But the report also contained sobering news on the decline of Gross Fixed Capital Formation (GFCF) as a percentage of India’s gross domestic product (GDP). A measure of the importance of fixed assets rather than consumption within a nation’s economic growth, a high GFCF means that a country is laying the foundation for future high rates of development. India’s GFCF of 25.5 percent of GDP in the last quarter is thus troubling; it is closer to the expected rate for a developed country than in a rapidly growing country like India. A closer look at investment patterns suggests that this stagnation is set to continue and that its primary impact will be on the growth (or lack thereof) of manufacturing jobs.
While demonetization may have dragged GFCF downward at the end of the last financial year, the downward trend is longstanding. The CSO’s report shows nearly eight straight quarters of decline, bringing the rate from 30.4 percent in the first quarter of 2015-16 to 27 percent in the third quarter of 2016-17. According to World Bank data, GFCF reached its peak at 35.6 percent of GDP in 2007 and has been dropping ever since. This is not just because India’s GDP overall is growing faster than investment; the Annual Survey of Industries for 2014-15 (the most recent available) found that GFCF in the industrial sector peaked in 2012-13 at $654 billion billion in 2017 dollars and had fallen to $536 billion by 2014-15.
These somewhat esoteric figures are reflected in worrying trends in the Indian economy. Using data on investment intentions from the Department of Industrial Policy and Promotion, we can track what low GFCF looks like on the ground. The decline in GFCF as a proportion of GDP tracks neatly with the number of Industrial Entrepreneur’s Memoranda (IEMs) submitted by businesses intending to make a substantial new investment.
When we look at the value of proposed projects, the trend is equally clear (although investment values are more volatile):
What’s behind this drop in investment? There are multiple possible explanations, and likely many actual causes. But newly published research from the International Monetary Fund suggests that financial frictions — high leverage and a lack of access to capital — have significant negative effects on Indian firms’ investment plans. With that in mind it is sobering to note that in 2015 the total value of non-performing assets (NPAs) on the books of India’s banks passed the value of investment proposals, at $48.4 billion to $48.2 billion. In 2016, NPAs were valued at $92.4 billion versus $64.2 billion for investment proposals. (According to estimates, NPAs are now well past the $100 billion mark.)
For the average Indian, the primary effect of a lack of new investment means a lack of formal-sector manufacturing jobs. shows that after a few years of fair-to-robust industrial job growth, India’s job market hit a very rocky patch in 2013, one from which it has not yet recovered. This tracks with the drop in investment proposals in that same year.
Prior to 2013, India had an enjoyed an eight-year run of job growth, the first time it had achieved positive trends more than two years in a row since liberalization of the economy in 1991.
Between 2011 and 2015, the Department of Industrial Policy and Promotion (DIPP) received 13,999 investment proposals with a total value of $640.1 billion. But between 2012 and 2016 Indian industry invested only $64.9 million, for an overall yield of just over 10 percent. This poor showing masks the fact that actual industrial investment registered with DIPP grew sharply between 2011 ($2.85 billion in today’s dollars) and 2012 ($16.5 billion). In the following years, India has more or less managed to maintain this new level of investment but not to surpass it; total investment in 2016 was $15.9 billion. When measured in real terms, 25 of the 37 specific industries tracked by DIPP experienced either a drop or no change in investment between 2012 and 2016—nine of them saw investment fall by at least $155 million. Only two industries—sugar and textiles—saw investment grow by more than $100 million.
2016’s relatively good showing was driven by investment in sugar processing, an important sector but arguably a less desirable engine for growth than higher-skilled industries like chemicals and electrical equipment.
India’s has been the world’s top destination for foreign direct investment (FDI) for the past two years. But India’s leaders should still be concerned about slow capital formation in the industrial sector. The lion’s share of FDI goes to highly skilled services, where the investments benefit only a tiny fraction of Indian workers.
True job growth will come when industries such as textiles, electrical equipment manufacturing, and food processing achieve high and sustained levels of investment. From the perspective of job growth, investment in the Indian economy has truly stagnated.
Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.