One of the major policy challenges in India is to accelerate economic activity and speed up reforms.
In this context, however, much depends on the improvement in investment conditions, which have been sluggish for some time. For this, the government has been promoting public investment so that private investment is available, but there has not been much success in this.
While related factors such as bank and corporate balance sheets are showing improvement, it may take some time to see an improvement in investment.
Importantly, India is not an exception in this regard. Even before the COVID-19 pandemic, most countries in the developing world were grappling with the problems of low growth in investment.
According to a research study published in the World Bank’s recent ‘Global Economic Prospects’ report, real investment growth in developing countries declined from around 11 per cent in 2010 to 3.4 per cent in 2019.
Barring China, there was an even sharper deceleration in investment growth. It decreased from 9 percent in 2010 to 0.9 percent in 2019.
An increase in real investment actually plays an important role in maintaining long-term and sustainable economic growth through raising productivity and increasing incomes.
Less investment means less progress on the technology front in developing economies, which will also affect potential growth.
However, developing economies do not consist of the same countries.
Many commodity-exporting countries suffered losses due to low prices in the years following the global financial crisis, data from which are presented in this study.
This indicates that the condition of the global economy is worrying.
The COVID-19 pandemic has affected economic activities across the world and had a major impact on investment demand.
It is estimated that about 70 percent of emerging markets and developing economies will suffer investment shortfalls in 2020.
The recovery after the pandemic has been much slower than in the early years following the global financial crisis.
Keep in mind that investment depends on overall economic activity. Slowing growth in the global economy and a possible recession in large parts of the developed world will further delay recovery.
A 1 percent decline in output growth in the US or the euro area could reduce overall investment growth in developing economies by 2 percent.
As monetary policies in advanced economies tighten more than expected and global financial conditions tighten, higher public debt will affect the ability of governments in various countries to support investment.
Lower investment will affect long-term growth prospects in large parts of the world, with implications for global growth.
Despite some domestic factors being favorable, the prospects for investment growth in India will be affected by global economic conditions.
Uncertainty prevailing globally and slowing production growth will not encourage Indian companies to start investing aggressively even if capacity utilization improves.
The apprehension of a delay in the investment recovery will further complicate the choices for policy makers in the upcoming Union Budget.
This would mean that the government would have to keep investing, even if the fiscal deficit needed to be brought down as quickly as possible.
It is also to be noted here that the expected reduction in the inflation rate may also affect the revenue collection in the next financial year.
In such a situation, the challenge will be to arrange resources through revenue savings to continue capital expenditure and not to back down from reducing fiscal deficit.
A persistently high fiscal deficit could raise macroeconomic risks, including challenges on the external front.