Time to revive the animal spirits

Weak demand has kept India’s private investment subdued for over a decade, raising serious concerns about growth

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There have been three disconcerting features of private corporate investment in India.

First, a quantitative test suggests that a structural break occurred in 2011-12, highlighting a regime shift in the way private investment has behaved in the economy. Private gross fixed capital formation growth decelerated sharply to 10.3percent during 2012-24, from 40.7per cent during 2003-08 and 25.2 per cent in 2003-12.

‘The year 2011-12 was when the uncertainty index was at its peak due to weak macroeconomic fundamentals — high inflation, an unsustainable current account deficit, large capital outflows, and pressure on the exchange rate. India was described as one of the five most fragile emerging economies in 2013.

Second, the accelerator effect (a rise in private investment in response to a rise in economic activity) has weakened sharply post-2011-12. A one per cent increase in gross domestic product (GDP) growth now translates into an approximately 1.5 per cent increase in private capex, compared with about 3 per cent growth during 2003-12. This suggests that GDP growth no longer amplifies private investment as much as it did before 2011-12.

‘Third, public capital spending hardly “crowds in” private investment, with the correlation between public investment and one-year-forward private investment collapsing to 0.13 post-2012-13, from 0.54 during 2003-12.