Indian Express Editorial Analysis
02 December 2021

1. The long awaited investment cycle in here

  • Source: IE - Page 12/Editorial - Another Variant to Growth

  • GS 3: Investments 

Context: At 8.4%, GDP growth in the second quarter this fiscal, read along with high-frequency indicators, point to a faster-than-anticipated recovery amid rising commodity prices and supply-side bottlenecks.

    • And higher retail and wholesale inflation meant nominal GDP rose 17.5% in the second quarter. This is also borne out by data from CRISIL Ratings — upgrades outpaced downgrades 2.26 times in April-September.

    • We maintain our GDP growth outlook at 9.5% for this fiscal. But we expect a deceleration in the second half to 6.2% from 13.7% in the first as the low-base effect wanes.


The Drivers and the Draggers of the Economy:

    • The Drivers:

      • The swift pace of vaccination and low viral caseload triggered a gradual broad-basing of economic activity in the second quarter, with the gradual opening of the services sector.

      • Agriculture, which accounts for about 15% of the GDP, grew 4.5% on-year in the second quarter, maintaining its stellar run through the pandemic.

      • Growth in real government consumption has trailed GDP growth — it has contracted 14.2% in the second quarter on-year. Central government revenue collection has been exceptional this fiscal, buoyed by strong GST mop-up and high taxes on petroleum products. By the end of the first half, the Centre had already collected 60% of its targeted revenue for the full fiscal, but had spent only 47%. Data from 16 major states, however, shows that both revenue and spending trailed versus the Centre’s performance.

      • Turn of the investment cycle, both public and private. The second-quarter data shows that investment momentum is picking up faster than consumption. Fixed investments as a percentage of GDP rose between the first and the second quarters of this fiscal, while private consumption fell.

    • The Draggers:

      • Weakness is crept into manufacturing owing to supply-chain bottlenecks, notably in the automobile and electronics sectors.


The Revival of the Investment cycle:

    • The government has been focusing on reviving the investment cycle through high infrastructure spending and incentives to private investment, such as the PLI scheme. This fiscal, investments through the scheme have been to set up factories for pharmaceuticals, mobile phones and information technology hardware.

    • Building Infrastructure: Central government investments, especially to build roads and highways, are broadly on track, while state investments are lagging. Private sector capex is also showing signs of stirring.

    • Large corporates in sectors such as steel and cement have printed healthy capacity utilisation data. 

    • Deleveraging of the Private sector for a long time: They have also deleveraged in the recent past, which has provided a buffer in uncertain times and improved their financial profiles.

    • Brownfield investments have begun kicking in.

    • CRISIL estimates the PLI scheme could see Rs 2-2.5 lakh crore investments between fiscals 2022 and 2026, which would bolster overall capex.


Challenges in the investment uptick:

    • The success of the PLI scheme and infrastructure plan will be crucial to driving private investments as well as the overall cycle.

    • Risk of over-leveraging: The private corporate sector, after having over-invested during the boom of 2003-08, and recovery post the global financial crisis, will take a calibrated approach.


Challenges in Private consumption

    • Private consumption, accounting for over 55% of GDP, is showing a mixed run. It grew 8.6%on-year in the second quarter but trailed the investment momentum.

      • As a Percentage of GDP, it fell between the first and second quarters this fiscal.

      • While demand for high-ticket items — such as cars and utility vehicles — remains strong and is expected to cross the pre-pandemic level this year, for two-wheelers and some white goods it remains relatively weak.

    • Income Inequality: This consumption pattern broadly mirrors the widening income inequality spawned by the pandemic. It is also in line with the consumer confidence survey of the RBI published in October, which showed that despite improvement, consumer confidence continues to lag pre-pandemic levels.

    • But the cascading of input costs to end-consumers and the spike in vegetable inflation are consumption-negative.

    • Ways to revive Consumption expenditure:

      • Utilize MGNREGA: An offset here would be additional spending through the National Rural Employment Guarantee Act, which can support rural consumption and be a cushion for the poor for whom the free supply of foodgrains — introduced during the pandemic — would end soon.

      • Promote Exports: riding on high global growth, exports have provided extraordinary support from last fiscal. In both real and nominal terms, exports crossed the pre-pandemic levels last fiscal itself.

      • Relying on  labour-intensive services.

      • Lowering of fuel inflation, could support private consumption in the third and fourth quarters this fiscal.


Conclusion: Risks to growth are transitioning from pandemic-related to recovery-related, and many economies have begun pulling back the policy accommodation extended during in the recent past. The Omicron variant, by bringing pandemic-related risks to the fore, has reminded us that the virus is yet to be defeated. How it festers, or is quelled, and how policymakers react, or don’t, will determine how bumpy, or smooth, the ride from here will be.