Role Of Investment In Economy – Free PDF Download

HOW COMPANIES INVEST?

• Businessman put his money today, taking a bet on the future, when it would start yielding returns.
• Such bets are a function of the “state of confidence” at the time of investment.
• The investor has to be reasonably, if not absolutely, certain about the return — again based on today’s knowledge of tomorrow.
• The longer the time horizon, the more uncertain is the above knowledge.

CONSUMPTION VS INVESTMENT

• India’s current economic slowdown is showing because of consumption spending clearly falling, be it on cars or Rs 5 biscuit packs.
• But the crisis goes back longer, from the time companies stopped investing.
• Investment is what creates jobs and incomes.

NEW INVESTMENT

• A good indicator of “state of confidence” is new investment proposals.
• Their value fell from Rs 20 lakh crore in 2015-16, to Rs 10 lakh crore in the following 3 fiscals.
• During April-June this year, new projects announced amounted to a mere Rs 74,000 crore, against Rs 3,45,000 crore in the same quarter of 2018-19.

ECONOMIC SURVEY

• Fixing this mess cannot happen through consumption.
• Consumers will not spend unless they feel confident about jobs and incomes.
• Reviving the investment cycle is what the economy desperately needs.

BUT WHO WILL INVEST?

• Investment, as already discussed, is a function of confidence about prospective return from capital expenditures done today.
• In the current situation— the private sector is unlikely to commit to any significant investment for a considerable period.
• It has to be somebody else. (Government)

CHINA EXAMPLE

• In 1990, its annual per capita GDP, at $318, was lower than India’s $368.
• Today China’s per capita of $9,000 is nearly 5 times of India’s $ 2,000.
• This happened on the back of an investment-driven growth model.
• This investment mainly came from state-owned enterprises that invested heavily — in aluminum smelters and steel mills, empty airports and bullet trains etc.

WAY FORWARD

• India can definitely do with more public investment, especially in the given situation.
• But there are 3 major issues here–
• Resources?
• State PSUs capacity?
• Projects, land acquisition and statutory clearances?

Latest Burning Issues | Free PDF

Sharing is caring!