What’s in Today’s Article?
- Background (Context of the Article)
- About GFCF (Meaning, Importance)
- Low Private Investments (Current Trend, Reasons, Conclusion)
Background:
- Private investment in India, shown by how much businesses are spending on things like buildings and equipment compared to the total value of the economy, has been slow to grow.
- Since 2011-12, this kind of investment has been going down.
- The government expected big Indian companies to increase their spending, hoping this would boost the economy.
- To encourage this, in 2019, the government reduced corporate taxes from 30% to 22%, hoping that it would prompt companies to invest more.
What is GFCF and Why Does It Matter?
- GFCF stands for Gross Fixed Capital Formation.
- It refers to the growth in the size of fixed capital in an economy.
- Fixed capital refers to things such as buildings and machinery, for instance, which require investment to be created.
- So private GFCF can serve as a rough indicator of how much the private sector in an economy is willing to invest.
- Overall GFCF also includes capital formation as a result of investment by the government.
- Importance of GFCF:
- Fixed capital helps to boost economic growth and improve living standards by helping workers produce a greater amount of goods and services each year.
- In other words, fixed capital is what largely determines the overall output of an economy and hence what consumers can actually purchase in the market.
- Developed economies such as the U.S. possess more fixed capital per capita than developing economies such as India.
Current Trend in Private Investment in India:
- In India, private investment started to grow more after economic changes in the late 1980s and early 1990s made businesses more confident.
- Before these changes, private investment stayed around 10% of the total economy.
- On the other hand, government spending on projects (public investment) went up steadily from less than 3% in 1950-51 to more than private investment by the early 1980s.
- But after the economic changes, private investment became more important for building things like factories and infrastructure.
- Private investment kept growing until the global financial crisis in 2007-08.
- It went from about 10% of the economy in the 1980s to 27% in 2007-08.
- However, after 2011-12, private investment started to decrease, reaching a low of 19.6% of the economy in 2020-21.
Reasons for Fall in Private Investments:
- Some Indian economists believe that low consumer spending is the main reason private businesses aren't investing much lately, especially since the pandemic started.
- They think that when people spend more, businesses feel confident about future sales and invest more in things like factories and equipment.
- So, they suggest that the government should give people more money to spend, which could boost business investments.
- However, looking back at India's history, more consumer spending hasn't always led to more business investments.
- In fact, when consumer spending dropped from 90% of the economy in 1950-51 to 54.7% in 2010-11, it was followed by a peak in business investments.
- Since 2011-12, consumer spending has gone up while business investments have gone down.
- On the other hand, some economists think that deeper issues, like government policies and uncertainty, might be the real reasons behind the drop in business investments.
- They point out that when economic reforms began in 1991, business investments went up.
- But in the last two decades, when reforms slowed down, investments dropped.
- Uncertainty about government policies can also make businesses hesitant to invest in long-term projects.
Conclusion:
- Low private investment can slow down economic growth because businesses aren't spending enough on things like factories and machinery, which are important for increasing production.
- Some people worry that when the government spends more, it can discourage private businesses from investing because there's less room for them to grow.
- On the other hand, some believe that when private businesses aren't investing enough, government spending can help make up for it.
- However, it's generally thought that private businesses are better at deciding where to invest money than the government.
- Also, taxes used to fund government spending can slow down the economy by taking money away from businesses and consumers.