As slowdown becomes worse, factory investment sinks

The fall in investment rate is not surprising. But putting it together with rising share of wages in GVA, it shows that the focus is more on productivity, rather than adding new capacity, says Pronab Sen, former chief statistician of India.

In the year when the Goods and Services Tax (GST) was implemented, investment in the country’s factories fell to 22.4 per cent of the gross value added (GVA) by them, down from 27 per cent in 2016-17.

Only once in the past 30 years has gross fixed capital formation fallen below this level, shows latest data from the Annual Survey of Industries (ASI).

In nominal terms, factory investments, represented by gross fixed capital formation, contracted 10.3 per cent over 2016-17, showing their worst performance since 2002-03.

However, the share of wages paid to workers inched up to 13.1 per cent of GVA in 2017-18, from 12.7 per cent a year before.

It followed the trend observed since 2009-10, when the share of wages in GVA was as low as 9 per cent.

Similarly, employment in factories rose 4.5-5 per cent, with the growth rate rising marginally every year since 2014-15.

Put together, this shows that in the year immediately after the government’s demonetisation exercise, even as factories in the organised sector witnessed job growth and wage rise consistent with previous years, their ability to channel funds in productive capital was severely dented in 2017-18, experts said.

The ASI covers establishments (factories) which employ 10 or more workers with power or 20 or more without power.

“This data shows that demonetisation and GST had a sustained impact on macro parameters.

"Every indicator is now pointing to a contraction in investment demand in the period after the two disruptions,” N R Bhanumurthy, professor of economics at the National Institute of Public Finance and Policy, said.

He added that the rise in the share of wages in factory GVA indicated that there was no slowdown in consumption demand in 2017-18.

Former chief statistician of India Pronab Sen said this trend in investments was already visible in the national accounts for 2017-18.

“The fall in investment rate is not surprising. But putting it together with rising share of wages in GVA, it shows that the focus is more on productivity, rather than adding new capacity,” he said.

Outstanding loans too contracted in 2017-18, by two per cent.

But this fall in loans was milder than that witnessed in 2014-15, when factory loans had contracted 5.7 per cent.

Factories seem to have channelised most of the funds towards inputs, as the value of materials consumed as inputs rose 15.3 per cent in 2017-18, fastest since 2011-12.

Looking at wages, the average wage per worker grew 6 per cent in 2017-18, the lowest growth (nominal) since 2005-06.

After factoring in inflation, real growth in wages was merely 2.9 per cent.

In terms of value addition across various economic sectors, share of emoluments (wages plus compensation to supervisors and managers) grew across almost all sectors.

Photograph: Amit Dave/Reuters