New Delhi: Though private investment growth in India will remain challenging in the short term, it will eventually pick up in 2018-19 to overtake private consumption as the main driver of economic growth, the World Bank said in its latest India Economic Update released on Monday.
The gross fixed capital formation (GFCF) which indicates investment demand in the economy is forecast to grow by 3.3% in FY17, jump to 6.8% in FY18 and overtake private consumption (7.4%) in FY19 with 8.8% growth to become the major growth driver.
This is due to the key reform measures undertaken by the government such as the implementation of the bankruptcy law and the goods and services tax (GST), higher infrastructure push and continued inflow of foreign direct investment (FDI), the Bank said.
“The abolition of the Foreign Investment Promotion Board (FIPB) from FY18 will further support investment growth. Moreover, RBI’s efforts to reform the banking sector in addition to a higher steady state of banking sector deposits post-demonetization will eventually allow credit growth to recover robustly and sustainably,” it added.
Private investment continues to face several impediments in India in the form of corporate debt overhang, stress in the financial sector with rising bad loans, excess industrial capacity, and regulatory and policy challenges, putting downside pressures on India’s potential growth.
In February, the industrial production index (IIP) for capital goods contracted 3.4%, while credit to industry contracted 5.2%, suggesting that a meaningful recovery in private investments is unlikely until later in FY18.
“On the positive side, consumption will remain robust given declining inflation and solid household credit growth, and the pickup in trade is likely to endure at least through the first half of the fiscal year, helping lift investment,” the Bank said.
Private investment, which accounts for three quarters of total GFCF, has not been forthcoming despite the promise of crowding-in by public sector investments and government efforts to improve the business environment and facilitate foreign direct investment (FDI). GFCF contracted by 1.4% in real terms between April-September 2016 and GFCF as a percent of GDP have averaged 27.4% between Q3 FY16 and Q2 FY17 compared to a medium term average (5 year) of 32.4% of GDP.
“This weakness in private investment has been attributed to local and global excess-capacity leveraged corporate and bank balance sheets, and remaining domestic bottlenecks,” the Bank said.
After contracting for three consecutive quarters, GFCF grew by 3.5% in Q3 FY17. Supporting the view of an incipient pickup, production of capital goods expanded by 6.8% in January 2017 after 13 consecutive months of negative growth, imports of machinery rose by 13.5% in March, and FDI expanded by 10.9% in Q3 FY17 driven primarily by investments in the telecommunications sector.
At a time of weakness in investment growth, private consumption remains a stable growth driver, expected to range between 7.2% and 7.5% between FY17 and FY20. The minor deceleration in FY17 is offset by higher rural incomes from favourable agricultural growth, revisions to civil servants’ pay by an average of 24%, and declining inflationary expectations that boost real incomes.
The Bank expects the government to maintain its momentum in public infrastructure spending, with government capital expenditure by the centre budgeted at 3% of GDP in FY18, flat from the previous year. “Private investment is expected to pick up, but only gradually as recovery may be protracted in part due to relatively longer-term effects of demonetization on cash-reliant construction activities (household investment, largely housing, accounts for approximately 1/3 of total investment), corporate leverage and the persistent weakness in credit growth, which suggest that the financial sector may require more time to adjust,” it said.