The investment rate rose 39.8 per cent in FY11, but since then, it has been on a downslide, primarily due to the difficulties faced in project implementation and stagnation in capacity utilisation of the manufacturing sector
Clawing the economy back to an 8 per cent growth path will require bringing savings and investment rates closer to 35 per cent on a sustained basis, which were 30.2 and 29.6 per cent, respectively, in FY22, according to a report. As per India Ratings, a large part of investments will have to be in infrastructure, which can help revive private investments by easing supply constraints and offset the weakening of external demand due to global headwinds.
Higher investments will have to be accompanied by higher domestic savings to keep the savings-investments gap under check. The big missing link now is the government's focus on stepped-up capital expenditure on infrastructure, but not enough commensurate steps to encourage savings, the report noted.
This is because, this government, in its bid to simplify the income tax structure, has been steadily doing away with various incentives for savings, impacting household savings, which has been the mainstay of overall savings in the economy, it added. After the 6.6 per cent contraction in FY21, the economy is expected to close the outgoing fiscal with a 7 per cent growth, down from 8.7 per cent in FY22 and fall further to 5.9 per cent next fiscal.
The agency said that these growth rates are not enough for the nation to reap the benefit of demographic dividends, which demands that the economy has to clip at a sustained growth rate of over 8 per cent over the next two-three decades to keep the massive youth in the workforce.
It can be noted that investment and savings rates jumped significantly during FY 04-08 when the economy had its best growth rates. The investment rate rose 39.8 per cent in FY11, but since then, it has been on a downslide, primarily due to the difficulties faced in project implementation and stagnation in capacity utilisation of the manufacturing sector. The private corporate investment rate averaged 11.80 per cent during FY12-22 and fluctuated in the range of 10-13.63 per cent. Even households' investment rates averaged 11.80 per cent during FY12-FY22 but fluctuated in the range of 9.57-15.90 per cent.
Till about a decade back, households were the largest savers but their savings rate began to slip since FY16 when it plunged to 18 per cent from 23.6 per cent in FY12 but rose to 20.3 per cent in FY19. In the pandemic years, it was 22.4 per cent and 19.7 per cent, respectively. The investment rate of the public sector averaged 3.38 per cent during FY12-22 and ranged between 2.79-4.03 per cent and the investment rate of government averaged 3.71 per cent and ranged 3.45-4.22 per cent levels during this period.
The Centre has stepped up its capex lately and budgeted it at 3.3 per cent of GDP for FY24, up from 2.7 per cent in FY23 and 2.5 per cent in FY22, but has simultaneously reduced the capex of central public sector enterprises, which means no actual impact on the investment side.
What is more worrying is that the decline in the rate of investment in recent years is concomitant with the decline in the rate of savings, and so the rate of investment cannot be increased without an increase in the rate of savings or else it has to be financed with the help of foreign capital.
After households, the highest savers are the private corporates and their savings peaked at 11.9 per cent of GDP in FY16, then slipped to 10.5 per cent and 10.4 per cent in the pandemic years of FY21 and FY22, respectively. The public sector, which comprises both public non-financial and financial corporations, saw their savings rate fluctuating in the range of 2.3-3.4 per cent of GDP during FY12-22 and averaged 2.7 per cent. As the expenditure needs of the government invariably exceed its revenue receipts, their savings are negative and the combined (Centre + states) dissavings averaged 2.3 per cent of GDP during FY12-22 and peaked at 6.7 per cent during FY21.