The consumption boom and the record bottom lines have driven up the share of private corporate investment to 14.5% of GDP in 2006-07 from 6.6% in 2003-04. It is also pertinent that this period coincided with rising public savings (or falling government deficits), which freed up more resources and credit for private investment. The Incremental Capital Output Ratio (ICOR) of 200 large companies surveyed by the Economic Times, decreased from 0.62 in 2005-06 to 0.59 in 2006-07, reflecting increasing efficiency in the use of capital. The ICOR for the overall economy has also fallen from over 4 to about 3.5.
The average ICOR for the Tenth Five Year Plan period (2002-03 to 2006-07) was 4. This concealed large variations across sectors, with electricity showing an ICOR of 16.7, manufacturing 8.9, construction 1.2, and communications, and trade and hotels having a mere 0.6 and 0.7 repsectively.
Manufacturing, with recorded the highest growth in gross capital formation at 33.6% per annum for the tenth plan period, has a high average ICOR of 8.9. This suggests some build up of capacity, in anticipation of a growth in demand. Sectors like mining, railways and other transport, which showed high growth in capital formation, also have higher than average ICORs, which is understandable given the lag between the investment and its full operationalization. As the Economic Survey records, this could be the precursor to faster growth and lower ICORs in the Eleventh Plan period.
Trade, hotels, communications and construction sectors are those providing the highest bang for the buck. These sectors, with their low ICORs, can play a vital role in generating high employment with relatively low investment, and this assumes added importance as the government contemplates furhter rounds of fiscal stimulus to boost a flagging economy. But the Survey figures show that trade and hotels had the lowest GCF to GDP ratio of 6.2%, whereas electricity and manufacturing had similar ratios of 94.1% and 76.5%. While these ratios and the respective ICORs are partially explained by the high capital intensive and longer gestation nature of electricity and manufacturing sectors, it also points towards significant possibilities for efficiency improvements.
Another important observation is the slow growth of gross capital formation in Agriculture, at just 4.8% per annum for the tenth plan period. The share of agriculture growth to the total GDP growth was a mere 2.5%. Its ICOR was also at a relatively high 5, indicating that there is considerable scope for efficiency improvements. The figures for agriculture sector is a cause for deep concern, given the fact that over 60% of the population are dependent on agriculture.
Dani Rodrik and Arvind Subramanian captures some of these growth dilemmas in their brilliant IMFR working paper From "Hindu Growth" to Productivity Surge: The Mystery of the Indian Growth Transition.