Context:
- Last two years have witnessed nominal investment in India at about 33% of GDP and it is expected to remain at those levels in 2024-25.
- Current account deficit of India is expected to be only 0.7% of GDP in FY24, and will move to about 1.6% in H1FY25 compared to 1.2% in H1FY24.
- As a result, the CAD will hover around 1% of GDP in FY25, while absolute savings in the country would be 32% of GDP in that year, as was in the pre-pandemic period.
- India only managed to achieve a real GDP growth of 8.2% for FY24 which averaged at 8.3% in the last three years.
The Role of Corporate Sector in India’s External Deficit
- India’s corporate sector has recently shifted from being a major net borrower to becoming a mere small deficit sector.
- Corporate investments nearly totaled or slightly exceeded those of the sector based on savings from FY17-24.
- Public finances have become largely net borrowings from pre-pandemic levels but this is at a very slow pace in FY21.
- At that point, households had experienced net surplus with net financial savings (NFS) drastically decreasing from what they used to be in the previous past months, leading to the major conclusion that CAD outside India can only be kept in check by a highly cautious corporate sector.
Investment-to-GDP Ratio in Future
- Corporate investment revives and net corporate borrowing widens, CAD remains either higher or accounted for by increase in GDS led by lower fiscal deficit and/or higher NFS of households.
- The government sector is set to reach fiscal deficit at 4.5% of GDP within FY26 beyond which it is unclear whether such consolidation continues, and at what speed.
Challenges with Funding Higher Investment
- The investment-to-GDP ratio coming now on the rise is likely funded by some recovery in GDS and widening in the CAD.
- Funding Challenges for a Higher Investment
- The improvement in investment as a ratio to GDP can be said to be afforded by some improvement along the GDS as well as wider CAD.
- At most only up to two-thirds of this increase in investment are compensated by rising GDS.
- It indicates an urgent requirement for real investments in the economy.
- Real net fixed investment ratio over the last three years (FY22-24E) was about 23.5% of GDP, similar to the ratios during the previous pre-pandemic decade between FY11 and FY20.
- In order to grow by 8% while using an ICOR of 3.5, real net fixed investment needs to be at 28% of GDP.
