Investment worries

Global conditions would impede recovery

One of the big policy challenges in India is to strengthen economic revival. A lot in this context depends on investment revival, which has remained tepid for quite some time. The government on its part has been pushing up public investment to crowd in private investment but not with much success. While some of the enabling factors — such as bank and corporate balance sheets — have improved, investment revival may still take some time. Notably, India is not an exception in this regard. Much of the developing world was struggling with lower investment growth even before the pandemic. According to a study published in the latest “Global Economic Prospects” of the World Bank, real investment growth in the developing world slowed from around 11 per cent in 2010 to 3.4 per cent in 2019. Investment growth excluding China declined even more sharply from about 9 per cent to 0.9 per cent during the same period.
 

Growth in real investment plays a critical role in sustaining longer-term economic growth by boosting productivity and increasing incomes. Lower investment means lower technological progress in developing economies, which will affect potential growth. Although the developing world is not a homogeneous group and a number of commodity-exporting countries suffered due to lower prices in years after the global financial crisis, the numbers put out by the study, which has mapped much of the global economy, are concerning. The pandemic affected economic activity across the world and had a significant impact on investment demand. About 70 per cent of emerging-market and developing economies are estimated to have suffered an investment contraction in 2020. Revival after the pandemic has been gauged to be much slower than in the initial years after the global financial crisis.
 

To be sure, investment depends on overall economic activity. A slowing global economy and possible recession in large parts of the developed world would only postpone the possibility of revival. A decline in output growth by 1 percentage point in the US or euro area is estimated to reduce aggregate investment growth in developing economies by over 2 percentage points. Higher than previously expected tightening of monetary policy in advanced economies and tighter global financial conditions along with higher public debt will also affect the ability of governments in various jurisdictions to support investment. Low investment will affect longer-term growth potential in large parts of the world with implications for global growth.
 

The given global economic conditions would affect the prospects of investment revival in India, despite some of the domestic factors becoming favourable. Global uncertainty and weaker output growth would not encourage Indian firms to start investing aggressively even though capacity utilisation has improved. The possibility of further delay in investment revival would make choices more difficult for policymakers in the upcoming Union Budget. This would mean that the government will have to continue to invest even as the fiscal deficit needs to be brought down to a more manageable level as early as possible. It is also worth noting here that expected moderation in the inflation rate will affect revenue collection next fiscal year. The challenge, therefore, would be to find resources through savings on the revenue side to maintain capital expenditure and not compromise on fiscal consolidation. A sustained higher level of fiscal deficit could increase macroeconomic risks, including on the external front.