Investment
Investment is defined as an allocation of money in the expectation of some benefit in the future.
Generation of investment is aimed at mainly two objectives:
- For the infrastructure development capacity building
- For employment Generation.
A change in inventory or Addition to the stock of capital is also known as an investment. This is because it is expected to generate income in the future. Note that here the term capital refers to both fixed capital (building and machinery) as well as working capital (financial resources).
Investment in a country can happen in three modes:
- Investment Expenditure: The rise in the value of the firms’ inventories over a year. It captures how much businesses have invested in producing goods that are not yet sold, indicating anticipated future sales and production activity.
- Fixed Business Investment: Additions to machinery, factory buildings, and equipment utilized by firms. It represents long-term investments aimed at increasing production capacity and efficiency, contributing to the firm’s operational capabilities. It is often referred to as the Gross Fixed Capital Formation (GFCF).
- Residential Investment: Addition of housing facilities, including new home construction and improvements to existing residential properties.
These categories collectively help assess the health and growth potential of an economy.
Gross Fixed capital formation (GFCF)
GFCF or Gross Capital Formation (GCF) is the ratio of value addition in GDP invested in fixed capital rather than consumed.
It reflects the level of investment made by businesses and the government to enhance productive capacity. This measure helps assess economic health and growth potential, indicating how much an economy is investing in its future productivity.
It includes investment in infrastructure such as roads, bridges, markets, technologies, research and development etc.
Importance of GFCF
Investment in infrastructure, i.e. creation of GFCF has the following advantages:
- Creation of Assets: Investment leads to the creation of organisations, and physical and digital infrastructure, which acts as a permanent asset.
- Enhances future Productivity: It enables an economy to increase its productive capacity.
- Employment Generation: It requires a skilled workforce to run the infrastructure created.
- Fuels both Production and Consumption: Infrastructure fuels production, and employment fuels consumption.
In other words, it creates Economic Growth. Back-of-the-envelope calculation hints that India requires an investment of about 35% of gdp consistently to clock a 7% GDP growth rate.
Slowdown in Investment
India has a low investment-to-GDP Ratio and the investment rate is slowing down further unprecedented.
- The ratio of Gross fixed capital formation to GDP rose from 26.5% in 1993, reached a peak of 35.6% in 2007 and then slid to 26.9% in 2019. (World Bank)
- Investment rate as a share of GDP has declined by nearly 5.6% between 2011-12 and 2015-16. However, the savings rate declined by 2.5% between 2011-12 and 2013-14 and has remained range-bound thereafter.
- There is a Slowdown in savings too; except for 2016-17 when demonetisation happened. The slowdown in investment is more detrimental to growth than savings.
Ways to revive investment in India
The revival of investment needs to be prioritised urgently to arrest a more lasting impact on growth. India can regain 8-10% growth, if the GCF is pumped to 35%
- The government must create a conducive environment for SMEs to prosper and invest to help revive private investment.
- Reducing Taxes on Investment: There are five types of taxes on investment: Corporate tax, Capital gains tax (LTCG and STCG), Securities transaction tax(STT), and Dividend income tax above 10L (since 2017). This scenario is not ‘heartening’ for the investors. Taxes can be reduced.
- Government Investment: The total allocation to Capex expenditure has increased to 11.11 Lakh crore, which is about 3.4% of GDP.
- The monetisation of Assets: The government can monetise its fixed assets such as idle land to raise capital for development. This can enable private players to access land for cheap. The government has launched an Asset Monetisation program to achieve this aim.
- Raising project-specific investment via Government agencies: For example, The government has permitted bodies like NHAI and Metros to raise bonds from the market.
Emerging scenario
The investment-to-GDP ratio would improve, it is because:
- National Infrastructure Pipeline aims to bring more than ₹100L Cr investment plan for the next 5 years.
- Credit growth: Credit growth indicates interest in investment by the businesses. There are incipient signs that credit off-take is at double digits after a long time.
NITI Aayog in its document ‘Strategy for New India @75’, targeted investment rates to 36% by 2022-23 from 28% of 2017-2018. Currently, the GFCF-to-GDP ratio is around 34%, slightly short of this target.
