Growth and Investment Outlook for FY19

What is the issue?

The GDP growth outlook has recovered to over 7% currently.
Nonetheless, there are still some concerns in the investment domain as indicated by the “State Investment Potential Index” report.

What is the growth outlook?

The Indian economy is now growing at over 7% per year despite an uncertain external environment and mixed domestic conditions.
Further, all official and private forecasts have projected that the economy will grow at over 7% during FY19.
This return to 7% plus growth is quite remarkable as it comes despite monetary tightening in the western world, elevated oil prices, and tariff wars.
Though the situation is improving, rainfall is still in deficit in large parts of the economy, but prices have largely stayed stable thus far.
The economy has also not yet fully recovered from the shocks of demonetization and the GST, although short term implications have gone.

What is the investment outlook?

Agriculture and the public services segment are the key drivers currently, and both are supply-driven and independent of demand-side.
There are clearly limits to such supply-driven growth, as opposed to productivity or demand-driven growth.
Excluding agriculture and public services, investment is perhaps the single most important driver, especially when the export outlook is bleak.
The quarterly data indicates that the growth of real investment or “gross fixed capital formation” (GFCF) has been rising since 1^st quarter of FY18.
But the recovery remains weak and the investment rate (GFCF/GDP) remains well below the peak rate of 34.3% achieved in FY12.
Revival of the private investment cycle is vital in this context as private investment is the main component of real capital formation.

How can private investments be revived?

Macroeconomic factors like the aggregate fiscal and monetary policy stance are clearly critical for revival of the private investment cycle.
Further, structural reforms like GST which apart from strengthening indirect tax compliance has unified India into a common market.
Similarly, the Insolvency and Bankruptcy Code (IBC) would help reduce Non-Performing Assets (NPAs) pressure, to reviving private investment cycles.
Apart from these macro or countrywide factors, investment conditions in individual states are also critical for private investment.
In this context, the NCAER “State Investment Potential Index” (N-SIPI) report released recently was quite revealing.

What does the report say?

Land, labour, infrastructure, credit access, income levels, governance, cost of living, and pollution levels are major domains.
Factors such as land policy, efficiency, and prices are critical and states like Telangana, Madhya Pradesh, Tamil Nadu are ranked as best performers.
Availability of educated and appropriately skilled workforce and competitive wages are also vital; TN, AP and Karnataka are rated well here.
Infrastructure like road density, rail connectivity, and availability of power relative to demand is another significant aspect for investment.
Availability of credit is another driver in which Delhi, Punjab, Maharashtra, Haryana, Kerala and Tamil Nadu are ranked at the top.
Further, a broad spectrum of parameters like government policy, market demand, as well as levels of per capita income is critical for investments.
Governance pillar includes components like the maintenance of law and order, crime, corruption, efficiency of government processes.
Tamil Nadu, Haryana, Punjab, and Gujarat, are ranked at the top in this domain, while Telangana and Bihar are rated lowly.
On the other hand, concentration of industries can generate negative externalities of congestion, overload, high rental values and pollution.
Pulling together all aspects, Delhi, Tamil Nadu, Gujarat, Haryana, Maharashtra, and Kerala are ranked as the top 6 investment destinations.

What are the other specifics of the report?

Some minor differences notwithstanding, the overall classification of performing states is consistent with other ranking exercises.
Also, there is significant correlation between the “Ease of Doing Business” rankings of the Department of Industrial Policy and Promotion (DIPP).
Over 86% of respondents said they had no problem acquiring land, while over 68% reported no problem in the availability of skilled labour.
On the transition to GST, only 15% of respondents reported it was a severe problem against 56% who reported it was no problem.
Though the investment rate is still below its past peak, the investment and growth cycles are beginning to revive.
However, the N-SIPI report confirms an emerging pattern of divergence, with some states being left behind, which is of a concern.

Source: Live Mint