NEW DELHI: Investment rate may have approached 35%, the level needed for GDP growth of 7-8%, thanks to a big capex push by the government, but the composition of capital formation shows a declining share of industrial investments.
The share of productive assets such as machinery in gross fixed capital formation (GFCF) has fallen consistently in recent years, while that of dwellings has increased. Unless the trend reverses, sustaining growth over a longer period may be difficult, economists feel.
The share of dwellings, other buildings and structures in GFCF has risen to 55.4% in FY23 from 52% in FY16. In contrast, the share in machinery has fallen to 33.9% from 35.8% during the same period. The share of GFCF-to-GDP has remained stagnant at 33% since FY22 from the peak (new series) of 34% in FY12.
The new government’s challenge will be to propel strong investment growth in plant and machinery to push up manufacturing from just 15.8% of GDP at present, slipping from 17% in FY21. In fact, the target was to increase it to 25% of GDP, first set by the Manmohan Singh government in 2012, and was repeated by the Modi government when it launched its ‘Make in India’ programme in 2014.
The share of machinery falling is a reflection of excess capacity in several companies, especially in the non-infra space, and that is why companies are not buying more machines, say economists. In fact, because of the lower demand conditions in the market, the capacity utilisation rate has remained range-bound at 74%, show RBI data.
The share of dwelling have been increasing as individuals have been buying more houses because of stable real estate prices across the country, barring few pockets in metros. Moreover, banks and non-banking financial companies have been pushing loans for mortgages which have come at attractive interest rates before the central bank started to increase the interest rate from May 2022. It raised the repo rate from 4% in May 2022 to 6.5% in February and paused thereafter.
Madan Sabnavis, chief economist, Bank of Baroda, says both need to increase to feed growth. “Machinery is necessary and for this to happen investment has to increase which will happen only as consumption goes up.”
A recent report by HSBC says that it is private capex that has prompted the investment spurt, led by ‘dwellings and structures’. “This chimes well with the strong growth we see in house sales and housing loan growth. But the other important component of investment – ‘machinery and equipment’ – has fallen, and it would be premature to call the start of a new investment cycle, at least at this point,” it notes.
Private sector spends most of their capex on machinery and other related productive assets, while capex by households and the government sector channel most of their capex on dwellings and buildings. However, private sector capex has not picked up pace.
Says Paras Jasrai, senior analyst, India Ratings and Research, “Post FY21, we have seen an increase in infrastructure spending by the government and also an increase in physical assets savings by households (shifting from financial sector) thus leading to an increase in share of buildings, dwellings in overall GFCF.”
The share of the household sector in total GFCF is around 40%, 13% comes from the government and the rest from private and public sector companies. Gaura Sen Gupta, chief economist, IDFC FIRST Bank, says the rise in the share of dwellings in GFCF likely reflects rising share of household investments which tends to be concentrated in dwellings (real estate). “In FY16 household share in overall investment was 33% which has risen to 40% in FY23.”
Private capex has shifted clearly from manufacturing to services. Anitha Rangan, economist, Equirus Securities says, investments in traditional sectors like textiles, power, infrastructure which drove private capex earlier have shifted to services (transport, hotels, real estate, trade) which is the new age capex. “There is an expectation that as consumption recovers, and exports pick up private capex will pick up alongside but not necessarily to the scale earlier. Both manufacturing and services together will be the new engine for growth.”
Source: The Financial Express
