Increasing investments to stimulate growth(Fight slowdown in both dimensions - cyclical and structural)

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 Increasing investments to stimulate growth(Fight slowdown in both dimensions - cyclical and structural)

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• Slowdown is here : Two things brought it upon India - 
• Short-run cyclical slowdown (as seen in many indicators, showing a drop in demand in many sectors), and 

1. Long-term fall in investment and savings rate.
2. Without tackling both, nothing would happen.

• The GFCF story : The gross fixed capital formation (GFCF) relative to GDP at current prices has dropped since 2011-12. It went from 34.3% to 28.6%. So with an ICOR (Incremental Capital Output Ratio) of 4, potential growth rate is down by 1.4%.
• Sectors making up the GFCF : There are three- households, private corporate, and public sector. The period from 2011-12 to 2017-18 has two parts - (a) 2011-12 to 2015-16 when household sector investments rate fell, and (b) 2015-16 to 2017-18 when other two sectors' rates fell a little bit (actual industry feelers say they fell a lot).  [REFER TABLE]
• Gross Domestic Savings Rate : It fell from 34.6% to 30.5% from 2011-12 to 2017-18. Here, the fall was only due to household sector, with corporate and public sector savings rate actually rising!
• Impact of differential behaviour : Financing of investment was impacted. The corporates and public sector financed their deficits from surplus savings of households. The private corporates actually used their own extra savings only. They also got helped by foreign inflows.  
• Public sector focus : Since private sector is using its own savings for its investments, the surplus household savings are available for the public sector to borrow from. Use foreign inflows too. No 'crowding out' will happen. 
• Do two things : (a) A countercyclical policy to push growth rate to 7 - 7.5% p.a., and (b) Structural reforms to push growth to 8.5% (for the $5 trillion target).
• Monetary and fiscal : The 110 bps reduction by RBI in repo rates did not yield results. So focus on fiscal measures - additional PSU investments. But raising capital expenditure (of Union Govt.) is tough due to fiscal deficit problems. It was at 1.6% in 2019-20 Budget. (If RBI pays more dividend + more disinvestment happens, then possible)
• How to meet slowing demand : Usually, it's done by increasing govt. expenditure. State govts. and non-govt. PSUs can push their capital expenditures up. 
• Activate the financial system : Push it to lend more, and let go of fear.
• Structural reforms : Look at the FRBM Act. Move towards reducing revenue deficit to zero (by focussing on items in the Union List). That achieved, the Union Govt. can focus entirely on fiscal deficit, and push it totally towards capital expenditures (not on establishment expenses). That was the UK's "Golden Rule". 
• Summary : The government needs to handle both the cyclical slowdown and the structural slowdown, and it is possible to do it with some quick measures.

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