Exactly a year ago, Finance Minister Nirmala Sitharaman was disheartened that despite the corporate tax cut (2019) and the PLIs (from 2020) private investment wasn't picking up and told them the story of Hanuman to inspire. Now, the minister is optimistic and so are FinMin's monthly economic reports (MERs) and the RBI's bulletins.

What is the basis for such optimism?

Is private investment reviving?

The MERs claim "green shoots" in private investment which higher government capex is "crowding in". This assessment is based on various factors: (i) Crisil data showing CAGR of 7% in private industrial investment during FY18-FY22 (ii) CMIE data showing new investment announcements 11.6% higher in Q1 of FY24 – highest in 14 years (iii) private GFCF rising from ₹17.4 lakh crore in FY18 to ₹23.7 lakh crore in FY22 (current prices) (iv) capacity utilisation (CU) up by 76.3% in Q4 of FY23 (v) IIP up by 4.5% in Q1 of FY24, notably in capital goods and infrastructure/construction goods (vi) imports of capital goods up by 20.3% in FY23 and 4.2% in Q1 of FY24 (vii) bank credit non-food bank growing in double digit since April 2022, notably to infrastructure sector and (viii) "going forward", the PLIs and new-age sectors (green hydrogen, semiconductors, wearables and solar modules) are "expected to account for" 17% of the capex between FY13 and FY27.

The RBI's assessment is based on (a) credit growth and (b) new private projects sanctioned ("envisaged") reaching "a new peak" in FY23 since FY15.

The claims on "envisaged" projects (by the MER and RBI) mean nothing because the same RBI report also says only 15% of such projects translate into "actual" private GFCF. The conversion rate has "declined significantly" – from 40.5% during 1971-72 to 2010-11 to 15.5% during 2011-12 to 2021-22. Going by this conversion rate, projects announced in Q1 of FY24 would mean actual private GFCF of ₹41,314 crore over several years – just 1.75% of ₹23.7 lakh crore of private GFCF in FY22 (the last fiscal for which this data is available).

The claims of private investment growing at 7% or rising from ₹17.4 lakh crore to ₹23.7 lakh crore in FY22 are without context. Here is the right way to look at these data.

The National Accounts Statistics (MoSPI) shows, private GFCF during the five fiscals of FY18-FY22 averaged 10.3% of the GDP. This is a significant fall from 11.5% in the previous fiscals of FY13-FY17. In fact, for the first time in the 2011-12 GDP series, private GFCF slipped below 11% in FY18 and continues to do so – ending at 10% in both FY21 and FY22.

If the back series of 2011-12 GDP is looked at, private GFCF has collapsed from a high of 16.8% in FY08. (All at current prices to match with the MER data.)

Why did this collapse from FY08 happen?

Three factors are at play:

  • FY08 was the beginning of the Great Recession of 2007-09.

  • Credit outflow to banks "slowed down" and banks "started facing" NPA problems from FY08 (says FinMin think tank NIPFP's study "Reviving Private Investment in India: Determinants and Policy Levers" published in November 2016).

  • Economic slowdown began towards the end of the UPA years – but was first masked by 2.5-3.7 percentage points of "overestimation" of GDP growth during FY12-FY17 in the new 2011-12 GDP series (ii) twin shocks of demonetisation, GST and (iii) the pandemic of 2020 and 2021.

Coming back to the present, the MER of August 2023 actually shows a falling graph of private GFCF (as percentage of GDP) in Q1 of FY24.

The RBI's September 2023 bulletin shows growth in overall GFCF (government plus private) was 8% in Q1 of FY24 – lower than the previous nine quarters. The MoSPI data shows, growth in overall GFCF falling from 25.6% in FY22 and 17% in FY23. Its growth averaged 9.5% during FY13-FY23 (current prices).

Thus, not just private GFCF, the overall capex (government and private) is losing steam. Incidentally, the Centre's capex in Q1 of FY24 grew at 59% - much lower than states’ capex growth of 74.3% (MER, Aug 2023).

Do CU, IIP data point to need for capacity creation?

The RBI's latest report on capacity utilisation of manufacturing units shows it averaged 74.3% in FY23 – after languishing at 65% in FY21 and FY22 (pandemic hit). This is an improvement but doesn't necessarily point to the "need for additional capacity creation" for many reasons. One, a capacity utilisation of about 75-76% still mean 24-25% of idle/unutilised/surplus manufacturing capacity. During FY10-FY12, it was close to or above 80%.

On the other hand, the IIP numbers (manufacturing) actually paint a depressing picture.

The latest data (MoSPI) released on September 12, 2023, shows:

  • Of the six use-based IIP indices, growth in four fell sharply during April-Jul 2023, compared to the corresponding period of FY23 – primary goods fell from 11% to 4.5%, capital goods from 22.4% to 4.8%, intermediate goods from 9.5% to 2.8%) and consumer durables from 19.7% to -2.7%.

  • Only two indices registered higher growth – infrastructure/construction goods rising from 8.8% to 12.2% and consumer non-durables from 0.1% to 6.8%.

  • Of three sectoral IIP indices, growth in two slipped sharply – manufacturing fell from 10.2% to 4.8% and electricity from 13.2% to 2.9%. The third, mining IIP, saw a moderate growth from 6.1% to 7.3%.

  • Overall IIP (general IIP) growth slipped sharply from 10% to 4.8%.

Taken together, the CU and IIPs numbers don't point to revival of private investment.

The rise in imports of capital goods (MER's claim) is contra-intuitive because its production (IIP) is falling sharply. Is it because of (a) over-invoicing for money laundering or (b) misclassification for evading tax? Investigations would clear the picture.

Double inversion in credit outflow

Credit growth has inverted in FY20. It is no longer driven by 'large industry' or 'industry' – which invest in manufacturing or infrastructure. It is driven by "personal loan" – for consumption expenditure, not produce goods and services. Personal loans overtook 'large industry' in FY20 and 'industry' and services in FY22. This trend continued in FY23 and also in Q1 of FY24.

There is a second inversion: Services overtook 'large industry' in FY20 and 'industry' in FY23 – which continues in Q1 of FY24.

As for the MER's claim that credit flow to infrastructure has improved, this rise is very marginal – just 1.5% in one year between June 2022-June 2023 – its own data shows. The MER's last point is "going forward" PLIs and new-age sectors would bright higher private investment. This is for the future.

Other bad signs for private investment

Consider the following facts:

(a) Growth in manufacturing GVA is falling from 6.1% in Q1 of FY23 to 4.7% in Q1 of FY24 – both lower than overall GVA growth of 11.9% and 7.8% in the respective quarters. In fact, manufacturing GVA grew at 1.3% in FY23 when the overall GVA grew at 7% (all constant prices).

(b) Growth in consumption demand (PFCE) is going down from 20% in Q1 of FY23 to 6% in Q1 of FY24 – which are also below the respective quarters' overall GDP growth of 11.9% and 7.8%. The quarterly growth in PFCE is also below their annual growth of 11.2% in FY22 and 7.5% in FY23 (all constant prices). This is a very worrying sign (red-flag).

(c) Growth in government expenditure (GFCE) is going down from 1.8% in Q1 of FY23 to -0.7% in Q1 of FY24. These are also below their annual growth rate of 6.5% in FY22 and 0.13% in FY23 (all constant prices).

(d) The RBI's estimate shows the GDP would sequentially slowing down from 7.8% in Q1 to 5.7% in Q4 of FY24.

(e) Here is another bad news: Growth in FDI inflows is consistently slowing down from 25% in FY15 to 3% in FY23 and (-)16% in FY24 (up to June 2023) – as per the DPIIT (Department for Promotion of Industry and Internal Trade). A recent Nikkei Asia report explains that this is because MNCs are finding Vietnam and other competitors more attractive.

To sum up, the proverbial 'Hanuman' is still not flying but still grounded for the past 15 years (after reaching 16.8% of the GDP in FY08).

It's time for the Centre and the RBI to carry out comprehensive studies, consult experts, debate and devise plans and strategies to improve private investment.

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