Theme : Economy
GS - 3
TABLE OF CONTENT
- Gross Fixed Capital Formation & Private Consumption
- Current Scenario
- What is IIP?
- Consumer Sentiment
- Economic Recovery Scenarios
- Road Ahead
Context : Finance Minister Nirmala Sitharaman previously asked captains of industry what was holding them back from investing in manufacturing.For revitalizing private investment, the government had in September 2019 cut the tax rate for domestic companies from 30% to 22% if they stopped availing of any other tax SOP (standard operating procedure).
Gross Fixed Capital Formation & Private Consumption :
- Gross fixed Capital Formation (GFCF) represents investment demand within the economy.
- As per RBI, GFCF refers to the mixture of gross additions to fixed assets (i.e., fixed capital formation) and changes in stocks throughout the enumeration amount.Fixed asset refers to the development, machinery, and equipment.
- GFCF isn’t a measure of total investment, because only the worth of net additions to fixed assets is measured, and every one variety of monetary assets, further as stocks of inventories and other operational prices are excluded.
Private Final Consumption Expenditure :
- Private final consumption expenditure is defined as expenditure on goods and services for the direct satisfaction of individual needs.
- Whereas government consumption expenditure includes goods and services produced by the government, as well as purchases of goods and services by government that are supplied to households.
Current Scenario :
- Indian private sector investment has been weak for almost a decade now; It isn’t a recent phenomenon. Even before COVID-19 hit, our economy had started to slow down.
- Most of the drivers of economic growth have deteriorated: export is down because of the global slowdown, the government’s ability to support domestic demand is also limited as the fiscal deficit comes down.
- Because of the K-shaped recovery, private consumption is only concentrated in some parts of the income pyramid.
What is IIP?
- The Index of Industrial Production (IIP) is an index which shows the growth rates in different industry groups of the economy in a stipulated period of time.
- It is a composite indicator of the general level of industrial activity in the economy.
- IIP is compiled and published monthly by the National Statistical Organization (NSO), Ministry of Statistics and Programme Implementation.
- IIP measures the performance of the economy on the basis of eight core industries, with 2011-12 as the base year.
Consumer Sentiment :
- Private companies invest when they are able to estimate profits, and that comes from demand.
- The Centre for Monitoring Indian Economy’s (CMIE) consumer sentiment index is still below pre-pandemic levels but is far higher than what was seen 12-18 months ago.
- Manufacturing firms recorded a sequential uptick in new orders while infrastructure firms displayed optimism on the overall business situation, turnover and employment.
- Capacity utilization is now much better than what it was during the pandemic when it had slipped to 67-68%.Capacity utilization refers to the manufacturing and production capabilities that are being utilized by a nation or enterprise at any given point.
Economic Recovery Scenarios :
Economists are busy describing the shape of the post-pandemic recovery given its complex nature. There are different shapes of economic recovery:
- V-shaped recovery - it is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline. Such recoveries are generally spurred by rapid readjustment of consumer demand and business investment spending.
- K-shaped recovery- is one in which the performance of different parts of the economy diverges like the arms of the letter "K". In a K-shaped recovery some parts of the economy may see strong growth while others continue to decline. Overall, the natural consequence of a pandemic is the widening of inequality and a K-shaped recovery.
- W-shaped recovery- is when an economy passes through a recession into recovery and then immediately turns down into another recession. It is also called the double-dip recession.
Industrial investment is closely linked to economic recovery since no industrial house or investor would like to invest in a sinking sector.
Road Ahead :
Capital expenditure by the government is a precursor to private investment but it would take a sustained trend in public spending, for about half a decade at least, to help kindle enthusiasm in the private sector.
- Government must identify the right projects : Investments must be made in productivity-enhancing infrastructure.
- Inflation could derail the best designed public spending programmes, and we must take a step up in agricultural produce to help rein in food inflation.
1. What is GFCF?
Answer : Gross fixed Capital Formation (GFCF) represents investment demand within the economy.
As per RBI, GFCF refers to the mixture of gross additions to fixed assets (i.e., fixed capital formation) and changes in stocks throughout the enumeration amount.
2. What is IIP?
Answer : The Index of Industrial Production (IIP) is an index which shows the growth rates in different industry groups of the economy in a stipulated period of time.It is a composite indicator of the general level of industrial activity in the economy.