Can higher fiscal deficit revive investment demand?

Advance estimates of national income for 2015-16 were released by the Central Statistics Office (CSO) on 8 February. The press note from CSO shows total gross fixed capital formation (GFCF) is expected to be Rs.39.82 trillion, compared with Rs.38.44 trillion for the year 2014-15.

In 2011-12, GFCF as a percentage of gross domestic product (GDP) was 33.6%. It is estimated to be around 30% of GDP in 2015-16. Ahead of Budget 2016-17, lack of investment demand is a major macroeconomic concern.

During the last five years, the share of capital formation in manufacturing remained constant at around 18%. The share of investments in other key sectors, namely, construction, transport and storage and communication services, have also declined. Decline in investment in these critical sectors only indicates that all is not well with the economy.

+Within GFCF, the only sector where there has been a sudden increase in the share of investment is ‘trade, hotels and restaurants’, which might be a reflection of credit-led growth in consumption demand.

What should be done to revive investment demand for critical sectors of the economy? The most talked-about policy stimulus seems to be relaxation of the fiscal deficit target for the year 2016-17 to increase public capital spending to crowd in private investment. This is the easiest thing to do for any government and can be done provided public capital spending leads to an automatic increase in private investment demand.

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