Financial Daily
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Friday, February 09, 2001



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`Investment famine' grips India Inc?

Harish Damodaran


THERE was a time in the early 1990s when private corporates went on a massive investment binge, buoyed by the optimism accompanying the initial burst of economic reforms and liberalisation that unshackled their `animal spirits'.

Private corporate investment, as a share of gross domestic product (GDP), rose from 4.3 per cent in 1990-91 to 5.6 per cent in 1993-94 and 6.9 per cent in 1994-95, before peaking at 9.3 per cent in 1995-96. 1995-96 was also momentous considering that for the first time, the organised private sector emerged as the dominant investor, displacing the public sector which had hitherto assumed the `commanding heights' role in the Indian economy.

Thus, while in 1993-94, private corporate investment amounted to only Rs 48,213 crore, compared to Rs 70,834 crore of gross capital formation by the public sector, the corresponding figures in 1995-96 stood at Rs 1,09,717 crore and Rs 90,310 crore, respe ctively.

Subsequently though, the ratio of private corporate investment to GDP fell to 8.1 per cent in 1996-97, eight per cent in 1997-98 and 6.6 per cent in 1998-99. But even in these years, the private sector continued to invest more than the public sector.

In 1999-2000, however, not only did private corporate investment slid further to 6.4 per cent of GDP, but the public sector re-emerged as the dominant investor in the economy. As against public investment of Rs 1,38,186 crore, the figure was only Rs 1,25 ,221 crore for private corporates.

The Central Statistical Organisation is yet to compile aggregate savings and investment data for the current fiscal. But in all likelihood, the picture would only have worsened. Ever since last year's commissioning of Reliance's refinery, Tisco's cold ro lling mill and the Haldia petrochemicals complex, there have hardly been any `big ticket' investments, be it in polyester, steel, cement, tyres, auto or agri-business.

If at all any major projects are being executed on the ground now, they largely involve `brownfield' expansion or completion of ongoing works, such as phase two of the Dabhol power project.

Even if one takes into account the much-hyped corporate investments in the laying of optical fibre cables, the fact cannot be denied that India is passing through one of its worst `investment famines' in recent times.

And what makes this famine unique is that unlike previous episodes of inactivity, there are no usual constraints in terms of savings, forex reserves (for importing capital equipment) or wage goods (foodgrains).

It can be seen that while corporate savings as a proportion of GDP have fallen from 4.9 per cent to 3.7 per cent between 1995-96 and 1999-2000, there has, however, been a more than offsetting increase in households' financial savings from 8 .9 per cent to 10.5 per cent. True, the public sector has become a net dis-saver over the last two years, from being a marginal saver earlier. But even here, it may be noted that savings of public sector undertakings (as distinct from Government departme nts that are enmeshed in revenue deficits) have gone up from four per cent in 1995-96 to 4.2 per cent in 1999-2000.

That inadequate savings are not a real constraint is also borne by the fact that banks are now holding Government securities in excess of Rs 1,00,000 crore.

Neither are financial institutions lending much, though the reason here has more to do with the absence of any worthwhile project proposals. And all this slackness is in spite of interest rates currently ruling at their lowest in over a decade.

In fact, the economy seems to be on the verge of Keynes' famous `liquidity trap', wherein investment levels are indifferent to any further interest rate tinkering and monetary policy is not effective enough to rekindle the `animal spirits' of entrepreneu rs (incidentally, 20 per cent-plus interest rates did not deter companies from investing in the early post-reforms period).

The situation now is similar to what has been happening in the Gujarat earthquake's aftermath. There is no dearth of resources, whether it is funds or relief material from both within and outside. But there is simply no agency to undertake the real relie f and rehabilitation work on the ground. Where it is crucially required, the sentiment is just missing!

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