India's investment failed to pick up despite Modi's 4 years' reforms, manufacturing hit by demonetisation, GST: Crisil

By Rajiv Shah 
India's top consulting firm, Crisil, backed by its international partners, Standard & Poor, has regretted that four years after taking over the reins, and despite "a plethora of facilitations and reforms", the Modi government has "not been able to decisively push the investment cycle", insisting, "Investments have become the sore point of the Indian economy."
Crisil, in its report released last weekend, said, "The share of gross fixed capital formation, or fresh investment in the form of plant and machinery, dwellings and other buildings, etc., in GDP averaged 31% in the past four years (fiscals 2015 to 2018), compared with 33.6% in the previous five years (fiscals 2010 to 2014)."
Pointing out that the household sector "was the biggest contributor to investment in fiscal 2012 (share of ~45%)", Crisil said, "Since then, household investment has been on a consistent decline and its share in total investments was ~31% in fiscal 2017." It added, "Purchase of houses is generally the largest part (more than three-fourths) of household investment, so a slowdown in this factor is the key reason for the decline."

Underlining that "private corporate sector-led broad-based investment revival will have to wait", Crisil said, the immediate reason behind this is, being a "pre-election year, uncertainty can dampen/delay private investment." It added, "Election season is generally marked by uncertainties, both regarding change in regime and policy focus. Large investment commitments, especially by the private corporate sector, therefore, may be unlikely".
Pointing out that, because of slowdown in investment, manufacturing in India has failed to pick up, Crisil said, this has happened because of slowdown in domestic demand – both household consumption spending and investment spending – "in the four years through fiscal 2018 compared with the preceding five-year period."
Then, Crisil said, "Most of the slowdown post fiscal 2015 was seen after demonetisation. The cash crunch following demonetisation reduced private consumption growth. Within private consumption, rural consumption was particularly hit as farm realisations wilted during this period."

Slowdown in manufacturing, said Crisil, has also been caused by a fall in merchandise exports, which constitute about 14.4% of total merchandise export growth. It fell "significantly to 3.7% on-year on average in the four years beginning fiscal 2015 compared with 8.7% in the preceding five-year period. The drop came despite an improvement in world GDP growth and export volume growth in this period."
"In value terms", said Crisil, "The fall in India’s merchandise goods was sharper, with average growth between fiscals 2015 and 2018 at -0.2%, compared with 14% between fiscals 2010 and 2014. Within goods exports, manufacturing-related goods have also seen a slowdown in export growth. However, import growth of manufacturing related goods has increased during the Modi government."
Given this framework, suggested Crisil, the Modi government's target of manufacturing sector occupying 25% share in the economy by 2022, is unlikely to be met. To meet this target, it said, "manufacturing will have to grow at least 17.5% on-year, on average, between fiscals 2019 and 2022", while today the growth rate is less than half as much. "Even to raise the share to 20%, manufacturing will have to grow ast least 11% per year", it added.