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Published on 10/01/2019 12:14:17 PM | Source: Motilal Oswal Securities Ltd

Financing of investments — the key constraint to higher growth - Motilal Oswal

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Financing of investments — the key constraint to higher growth

Lower savings render any investment revival unsustainable

*In its ‘Strategy for New India @75’, NITI Aayog has argued that increasing the investment rate, as measured by gross fixed capital formation (GFCF), from the current ~29% to 36% of GDP by 2022 is the first key step to achieve a high growth of 9% by 2022-23.

* The highest level of investment rate was 34.3% in FY12 (as per the new series) and ~33% in FY08 (as per the old series). The document does not mention any rationale for the target (why not 34% or 40%?) nor does it include a strategy to achieve the highest-ever investment rate in India over the next four years.

* Further, while there is an explicit target for investment rate, no such target has been fixed for domestic savings – the key source of financing investments. We firmly believe that this highly-ignored macroeconomic indicator called ‘domestic savings’ is the biggest structural constraint to push India’s economy into the high-growth phase.

* When there is a plan (or hope) to push India’s investments higher, the first obvious question is “Where will the financing come from?” At the best of time (in FY08), foreign savings (called ‘current account deficit’) accounted for less than 5% of total investments, and as much as 11-12% during the most fragile period (FY12-13). Without a major pick-up in domestic savings, any strong revival in investments would be highly unsustainable and the authorities would do well to avoid (or encourage) any such recovery for short-term gains.

 

NITI Aayog stresses the role of higher investments…: Indian government’s thinktank — NITI Aayog (erstwhile Planning Commission) released its 5-year vision note titled ‘Strategy for New India@75’ last week. Its target is to achieve 8% average real GDP growth during the 5-year period ending Mar’23 – also the year independent India turns 75. In order to achieve targeted average growth (implying 9-10% growth by 2022-23), the document emphasizes the need to increase the investment rate, as measured by Gross Fixed Capital Formation (GFCF), from the current ~29% to 36% of GDP by 2022.

Indeed a tall order as India’s investment rate has never crossed 35%, with the highest level measured by GFCF being 34.3% of GDP in FY12 (as per the new series) and ~33% in FY08 (as per the old series). The target implies that investments must grow at a CAGR of ~18% for the next five years (assuming average GDP growth of 12.5%). This, to our mind, looks almost impossible (Exhibit 1-2). Moreover, “…About half of this increase must come from public investments, which is slated to increase from 4% to 7% of GDP…,” states the document. But, how it will be achieved is still very unclear?

 

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