High Growth Trajectory: The FDI & The Uncelebrated Saver
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E COSHASTRA
Exhibit 4: Sector-wise ICOR ! !
Exhibit 4 provides the following insights !
1. Investments in Electricity & Gas have most significant effect on improvement in productivity, followed by investments is Mining and Manufacturing 2. The National ICOR is 4.04
Exhibit 5: Potential GDP growth rate in 2013-14
Two observations can be made from the exhibits 4 and 5. Firstly, the foreign direct investments have always been minor compared to investments from households and private corporates. Secondly, there is a pattern of slowdown in growth of investments from private corporate and foreign sector since the world economic crisis of 2008. So, given that the slowdown in economic growth is due to slowdown in investments by corporate and households, the situation clearly calls for application of Keynesian principles. But given the figures of high fiscal deficit (4.9 % in 2012-13), the GOI is not in a position comfortable enough to go on spending spree to propel the economy. This is why the quality of spending has attained its vitality which inevitably leads to conclusion that the spending should be aimed at increasing the productive capacity. th
At the outset of the 12 5-year plan, the Planning Commission has calculated the required investment in different sectors and estimated productive capacity improvement thereof. This figure, technically called as Incremental Capital Output Ratio (ICOR), is an indicator of the productiveness of an investment in a sector. !
AUGUST 2013
So, putting all of the above factors together, 1. FDI does not necessarily accelerate economic growth. It is more of a lagging indicator of development. 2. Indian Economy has high saving rate like other Asian economies, Average Gross Domestic Saving (as % of GDP) since 200001 is 31% 3. Indian economy is different from other Asian economies as it is consumption driven. So, this makes the job of reviving economy easier the current slowdown can attributed to anaemic demand. 4. So, the solution lies within. The domestic saving by themselves can lend to a growth of 8.6 % next year (ref. exhibit 5). Rather than trying to restore the economic growth through foreign investments, the focus should be on attracting the domestic savers (households & Private Corporates) and making qualitative utilization of Public sector spending.