Lack Of Private Sector Investment Cripples India’s Growth

According to latest RBI data, demand for credit by major sectors of our economy has dipped with food credit falling to Rs 40,000 crore in March 2017 from Rs 1.03 trillion in March 2016 and non-food credit getting almost half of what it was in 2015-16

Private investment and private savings are in a deplorable state. Last fiscal year, investment by private sector saw an abysmal rise of 5.8 per cent. The rate of gross domestic savings (at current prices) also fell from 34.6 per cent of gross domestic product (GDP) in 2011-12 to 32.2 per cent in 2015-16.

According to latest Reserve Bank of India (RBI) data, demand for the credit by major sectors of our economy has dipped with food credit falling to Rs 40,000 crore in March 2017 from Rs 1.03 trillion in March 2016 and non-food credit getting almost half of what it was in 2015-16. The figures highlight that industrial credit off-take has toned down and the outlook for future investments also seem insipid.

Since a large number of private firms are facing debt overhang and this debt has been financed by banks, the economy is witnessing a vicious cycle where the private sector investors are not investing and banks, particularly public sector banks are avoiding lending corporate or commercial loans. The credit off-take of medium and small enterprises which are significant contributors to the economy is also in the negative zone.

India Ratings and Research in its latest report said, ‘We now expect gross fixed capital formation for the financial year 2017 to grow at 2.0 per cent, down 306 basis points from our earlier projection’. At such time, the government should make efforts to leverage public financial institutions like India Infrastructure Finance Company to boost investment.

Jimeet Modi, CEO, SAMCO securities told BW Businessworld, “In order to boost investment in private sector, there should exist low-interest rate regime and single window project clearance mechanism which are the few hurdles still remaining. GST is already in place which earlier was the biggest hurdle to attract investments on a large scale.”

While the government’s effort to bring reform through goods and services tax needs to be praised, the Central Bank and the government must also try to better the investment atmosphere of the country. According to a report released by HSBC last year, “Public investment had been very strong last year, holding up overall investment despite a contracting private sector. The performance this year is much worse.”

Increased allocation for public infrastructure investment along with a dip in global oil prices will surely help India’s fast growth but we still need to counter challenges like the unfavorable global environment and a slow investment recovery to ensure smooth growth.