India's investment decline, at 8.5%, enters exceptionally severe phase: Economic Survey

By A Representative 
The “Economic Survey: 2017-18”, released by the Government of India a couple of days ago, has warned that the slowdown, having lasted at least five years, “has already surpassed the typical duration of slowdown episodes”, adding, “If it continued through 2017, as seems likely, it would have reached the six-year duration recorded in the exceptionally severe cases.”
Calling it a “balance sheet-related slowdown”, the top Union finance ministry document's chapter "Investment and Saving Slowdowns and Recoveries: Cross-Country Insights for India", says, “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.”
Even as pointing out that “India’s investment decline so far (8.5 percentage points) has been unusually large” when compared to other countries’ “balance sheet cases”, the Survey states, “India is now 11 years past its investment peak”, adding, “Investment declines flowing from balance sheet problems are much more difficult to reverse.”

Giving the example of other countries, the Survey says, balance sheet related investment slowdown “remains highly depressed even 17 years after the peak”, adding, “In case of non-balance-sheet slowdowns the shortfall is smaller and tends to reverse.”
“Given the large fall in investment that India has registered, it has paid moderate costs in terms of growth”, the Survey says, noting, “Between 2007 and 2016, rate of real per-capita GDP growth has fallen by about 2.3 percentage points”. It adds, “India’s investment slowdown is not yet over…”
Wondering whether l the investment slowdown (as that of savings) would reverse, so that India can regain 8-10 percent growth, the Survey repeats, “India’s investment decline seems particularly difficult to reverse, partly because it stems from balance sheet stress and partly because it has been usually large.”
Authored by a team headed by chief economic adviser Arvind Subramanian, a top-notch economist, the Survey adds, “Cross-country evidence indicates a notable absence of automatic bounce-backs from investment slowdowns. The deeper the slowdown, the slower and shallower the recovery.”
The simultaneous slump in investment, says the Survey, “gives rise to a question: Should policies that boost investment (viz. substantial infrastructure push, reforms to facilitate the ease of doing business or the ‘Make in India’ program) be given greater priority over those that boost saving?”
Refusing to commit, the Survey says, “Both set of policies are crucial in the long run”, asking, “But which one needs to be prioritized at present? The issue is about relative importance and urgency.”
The three major reasons that particularly hampered investment, according to the Survey, are – tightening of monetary conditions, demonetization and Goods and Services Tax.

The tightening of monetary conditions, says the survey, “depressed consumption and investment compared to that in other countries”, even as attracting “capital inflows, especially into debt instruments, which caused the rupee to strengthen, dampening both net services exports and the manufacturing trade balance.”
“Between early-2016 and November 2017, the rupee appreciated by another 9 percent in real terms against a basket of currencies”, the Survey notes. 

Investment and savings trend in India:
Over the years

“Demonetization”, says the Survey, “Temporarily reduced demand and hampered production, especially in the informal sector, which transacts mainly in cash”, and while the “shock largely faded away by mid-2017, when the cash-GDP ratio stabilized at that point GST was introduced.
It adds, the GST affected “supply chains, especially those in which small traders (who found it difficult to comply with the paperwork demands) were suppliers of intermediates to larger manufacturing companies.”
“Moreover”, the Survey says, “Even though the cost of equity has fallen to low levels, corporates have not raised commensurate amounts of capital, suggesting that their investment plans remain modest”, adding, “In other word, the twin engines that propelled the economy’s take-off in the mid-2000s – exports and investment – are continuing to run below take-off speed.”
According to the survey, “The current investment slowdown “the first in India’s history”, the Survey says, adding, though gradual, it “started in 2012 (when it surpassed the 2 percent threshold), subsequently intensified (surpassing the 3 percent and then the 4 percent thresholds in 2013 and 2014 respectively), and was apparently still continuing as of the latest date, that for 2016.”