Economic Survey Volume 1 Chapter 3 (Latest)
INVESTMENT AND SAVING SLOWDOWNS AND RECOVERIES: CROSS-COUNTRY INSIGHTS FOR INDIA
The chapter identifies episodes of saving and investment slowdowns, studies their patterns, examines how investment behaves in the aftermath of a slowdown and draws policy lessons for reversing India’s investment slowdown and re-accelerating GDP growth.
The expectation of domestic saving and investment accelerating soon and India reverting to 8-10% growth cannot be taken for granted as neither saving nor investment is unduly depressed.
- Investment (gross fixed capital formation) rate and gross domestic saving rate are actually above the levels that prevailed throughout the 1990s.
- The boom of the 2000s was exceptional, as India’s climb to about 10 percent real GDP growth was accompanied by an unprecedented 9 percentage point pick-up in domestic saving and investment rates.
- 2006-07 : 35% of GDP (investment and savings)
- 2017-18 : 28% of GDP
- The subsequent slide in investment and saving (as a percent of GDP) has merely brought these rates back towards normal levels.
- Such sharp swings in investment and saving rates have never occurred in India’s history–not during the balance-of-payments crises of 1991 nor during the Asian Financial Crisis of the late 1990s.
- Sectors responsible for the decline – fall in private investment and household/government 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.
- India is witnessing a significant decrease in investment and savings while the world has shown an average increase in the same time period.
IDENTIFYING INVESTMENT AND SAVING SLOWDOWNS
Some important observations:
- Investment episodes are more frequent than saving episodes, while common episodes (where both investment and saving slow) are relatively unusual. This pattern has reversed after 2008 due to concerted efforts of emerging economies to revive investment after the Global Financial Crisis via stimulus and other policies.
- Investment and saving slowdowns tend to be similar in duration. However, investment slowdowns are greater in magnitude and is more prone to extreme events.
- Cross country listing of investment and saving slowdown reveal slowdowns are quite frequent (even in success stories like China).
- India’s current investment/saving slowdown episode has been lengthy compared to other cases (investment slowdown started in 2012 and saving slowdown started in 2010) – and it may not be over yet.
SAVING VERSUS INVESTMENT: GROWTH CONSEQUENCES
- The standard solution on the question of solving investment or saving slowdown is that both the problems need to be tackled simultaneously. However, the issue is about urgency and relative importance.
- The survey providing evidence from certain studies observes that policies should focus on encouraging investment, rather than saving to boost growth.
RECOVERY FROM ‘INDIA-TYPE’ INVESTMENT SLOWDOWNS
- India’s investment slowdown is unusual in that it is so far relatively moderate in magnitude, long in duration, and started from a relatively high peak rate of 36 percent of GDP.
- It is a balance sheet related slowdown – Many companies have had to curtail their investments because their finances are stressed, as the investments they undertook during the boom have not generated enough revenues to allow them to service the debts that they have incurred.
- Investment declines flowing from balance sheet problems are much more difficult to reverse whereas in case of non-balance-sheet slowdowns the shortfall is smaller and tends to reverse.
- India’s investment decline so far (8.5 percentage points) has been unusually large when compared to other balance sheet cases. Due to this, it has paid moderate costs in terms of growth. Between 2007 and 2016, rate of real per-capita GDP growth has fallen by about 2.3 percentage points.
- Every 1% fall in investment dents 0.4 to 0.7% growth.
POLICY LESSONS FOR INDIA
In order to reverse the investment slowdown through policy action such as a clear and urgent policy agenda which the government has launched; first with the step-up in public investment since 2015-16; and now, given the constraints on public investment with policies to decisively resolve the TBS challenge.
Certain complimentary measures are required:
- Easing the costs of doing business further,
- Creating a clear, transparent, and stable tax and regulatory environment,
- Creating a conducive environment for small and medium industries.