CAMBRIDGE, MASS – It has been 18 months since Narendra Modi became India’s prime minister, following his Bharatiya Janata Party’s historic general-election triumph. The BJP’s overwhelming victory brought sky-high expectations that India’s economy, unshackled from the indecisiveness of the previous Congress-led government, would soar. Yet, as 2015 came to a close, the Indian economy was hardly flying high.
The optimists are right to feel disappointed, because they had genuine cause for hope. Given India’s large deficit in physical capital, they expected investment to rise as shovel-ready projects were restarted – and surely the new government’s emphasis on “Make in India” would mean new manufacturing projects.
Sadly, investment has not grown. More disturbing, several obstacles blocking its revival remain in place. Private-sector fixed-capital investment, as a share of GDP, peaked at 33.6% in 2011-2012 and has since trended down to the current low of 28.7% in 2014-2015. And this weakness is a countrywide phenomenon, with all major states registering a decline in ongoing projects over this period. Maharashtra and Karnataka, for example, both experienced a cumulative decline of about 15% in projects; the declines in Gujarat and Tamil Nadu were sharper, at more than 20%.
As for “Make in India,” the reality is that capacity creation in manufacturing has suffered a cumulative decline of 35% from its peak in 2011. The cumulative decline in services, at 13%, looks moderate in comparison.