Investment-demand constrained economy

The latest macroeconomic data releases for India show that the gross fixed capital formation continues on its downward trend, non-food credit growth has dipped to single-digit, and corporate bottom-lines are at their weakest in a long time. Pointing to concerns that the turnaround may not be around the corner, Livemint highlights the capacity under-utilization problem,  

Key industries have huge capacity underutilization. In steel, from a maximum of 88% in 2012-13, utilization level is expected to be 84% in 2015-16. In cement, from a peak of 74% in 2011-12, utilization is down to an estimate 71% in 2015-16. In automobiles, this number is down from a peak of 80% in 2011-12 to an estimated 63% in 2015-16.

Apart from this, real estate market inventories have been piling up. The RBI's own survey shows manufacturing capacity utilization at 71.7% for Oct-Dec 2014, with no signs of a reversal. These trends do not point to any resumption of the investment cycle.

Signatures of consumer demand, for capital goods and consumer durables, too are not promising. As the RBI survey shows, order books of capital goods manufacturers has been declining. And in any case, businesses and banks are hobbled with bruised balance sheets. Business sentiment, as captured in the Business Expectations Survey of March 2015 conducted by the think-tank National Council for Applied Economic Research which tracks over 500 firms of varying sizes, had fallen 6.9% from previous quarter.

All this appears to point towards currently India being an investment-demand constrained economy. If this is true, monetary loosening, for all the hype surrounding it, would be pushing on a string! In any case, all this makes these numbers even more puzzling.