The architecture is not the force -Pulapre Balakrishnan

-The Hindu

How a business friendly government has failed to arrest the slide in private investment

It may appear that the recent hullabaloo over GDP (gross domestic product) growth in the past decade has cast a shadow over assessment of the economy’s progress since 2014, but it is not so. There exists enough information for this as GDP is not the sole indicator on which one needs to rely in such an exercise. Arguably, investment is another, mainly private investment, for governments can always raise their capital outlay ignoring the calculus of profitability.

The profit-economy link

For a private investor, on the other hand, financial commitments are based closely on anticipated profit. The expectation of profit is itself tied to the expected state of the economy. As much of the future is uncertain, some part of its expectation is likely to be based on current trends. Thus, private investment is tied both to the present state of the economy and its anticipated vigour. For a government interested in invigorating the economy, then, it is essential to inspire confidence in the private investor. The investment meant here is the expenditure on productive capacity as opposed to buying shares or even durable goods in secondary markets.

Private investment in relation to output has in most years since been lower than what it was in 2014. This may come as a surprise to some as the government of Narendra Modi had appeared a business friendly one. While noting the slide in private investment, two points may be made. First, the private sector comprises two segments, the corporate and the unincorporated, termed household, in Indian national accounts. Since 2014, after initially declining private corporate investment has shown a mild rise while household investment has fallen sharply. The overall effect has been downward. This despite the pro-business reputation of this government and the strong and repeated communication of the Prime Minister that it would support those who ‘Make in India’. Clearly this talk has not been enough to convince private investors, who probably find insufficient dynamism in the economy today and are unsure of the likely impact of the government’s policies on its future. The most business friendly government at the Centre in recent times has not had success in turning around a slide in private investment. This is the second point to note.

While ‘adventurist’ has been pronounced as a verdict on the economic policy since 2014, a purely economic explanation is at hand. The government may have mistaken the architecture for the force. For an economy, by architecture we would mean the framework within which activity takes place while force is the ebb and flow of the demand for and supply of goods.

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The Hindu, 5 December, 2018,

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