THE MISSING PIECE
GS Paper 3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Prelims Exam: ECLGS, GCFC
Mains Exam: Investment in the Economy
Centre has been pushing for investments, but private sector seems hesitant to take the plunge
What does the government data show?
- Few weeks after government data showed that the Indian economy was growing at a slower pace than expected,
- Despite various step taken by the government, there isn’t concrete evidence of a broad-based pick up in investments.
Investment activities are declining in the country as the Domestic private sector appears to be hesitant.
- Investment activity has remained muted since 2015-16, with the share of gross fixed capital formation, which connotes investments in the economy, hovering around 28 per cent of GDP.
- While activity did bounce back from the depths of the pandemic, at the end of 2021-22, investments were only 3.7 percent higher than their pre-pandemic levels of 2019-20.
Are bad loans and twin balance sheet problem responsible for the declining investment?
Gross Fixed Capital Formation (Constant Prices)
As per RBI, Gross capital formation refers to the ‘aggregate of gross additions to fixed assets (that is fixed capital formation) plus change in stocks during the counting period.’ Fixed asset refers to the construction, machinery and equipment.
- In the past, the twin balance sheet problem-an over-leveraged corporate sector and banks saddled with bad loans-was thought to have been holding back investment activity.
- Since then, corporate and bank balance sheets have improved, but large parts of the economy continue to struggle.
What is affecting the business sentiments?
- 16.4 percent of the loans availed by MSME under the ECLGS facility during the pandemic have turned bad as borrowers are not able to service the loans due to financial distress.
- Considering that the MSMEs account for a sizeable share of employment, this impacts both employment and income prospects.
- This uncertainty over job and income prospects reflects in consumer sentiments remaining in the pessimistic zone, which in turn affects business sentiment and investment decisions.
EMERGENCY CREDIT LINE GUARANTEE SCHEME(ECLGS)
- Announced as part of the Atma Nirbhar Bharat Package in 2020
- Objective: to help businesses including MSMEs to meet their operational liabilities and resume businesses in view of the distress caused by the COVID-19 crisis.
- Providing Member Lending Institutions (MLIs), 100 percent guarantee against any losses suffered by them due to non-repayment of the ECLGS funding by borrowers.