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Why job growth-igniting investments matter more than tracking rupee slide or rising prices

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If the sliding rupee against the dollar and rising prices have gained ascension in most evolved debates on the economic woes, it is perhaps time to reframe the conversations and get the focus on solutions.

Financial Express Online reached out to Mahesh Vyas, the managing director and CEO of the Centre for Monitoring Indian Economy (CMIE), a leading research firm that closely tracks employment and other key economic indicators. Essentially a numbers person, Vyas was clear on what would engage his attention in the days and months ahead. “It will be the employment and investment numbers,” he says and with good reason for investment, to him, “is the solution to our problems and therefore one will need to see the level of investments and the quality of investments. I will also be looking at how we are faring on employment and if it is getting worse. The risk factor that I see for the economy is employment and the solution in investment.”

What The Numbers Say

India’s employment rate, he says, is around 37 per cent and “it should reach the global average which is around 55 per cent.” The employment rate, he explains, “is the proportion of the population that is 15 years or more, which is employed.” Then, there is the unemployment rate of 7-8 per cent. “This is the proportion of the labour force that is looking for work and in unable to find any.” From a definition perspective, the labour force is the sum of all employed and unemployed people. It excludes those who do not seek employment.

On the unemployment rate, the CMIE numbers show an overall increase to 7.8 per cent in June 2022 as against 7.12 per cent in May 2022. However, urban India was at 7.3 per cent in June as compared to 8.21 in May 2022 while in rural India, was at 8.03 in June as against 6.62 in the same period.

Investment rate

On investments, the Reserve Bank of India (RBI) annual report 2021-22 talks of a gross domestic investment rate (as a percentage of GDP at current prices) falling from an average of 38.0 between 2009-10 and 2013-14 to 30.7 in 2019-20 and to 27.3 in 2020-21 (the last available figure). Ideally, most economists feel the country should be having a more sustainable investment rate of between 35 and 40 per cent. Similarly, for the same periods of time, the gross domestic savings rate (as a percentage of GDP) slipped from an average of 33.9 to 29.4 to 27.8 in 2020-21. Here again, the ideal preferred number is also around 35 per cent.

Investment breakup

Looking at the breakup of investments and giving a glimpse through a snapshot of the last available quarter numbers, Mahesh Vyas points out that investment proposals worth Rs.3.57 trillion to set up new capacities in the industrial, infrastructural and services sectors were made during the quarter ended June 30, 2022. This is much lower than the proposals worth Rs.5.91 trillion that were made in the preceding quarter which ended on March 31, 2022. But this was an exceptionally large value of new investment proposals. The average investment proposals in the preceding three quarters worked out closer to Rs.3.2 trillion. What is however striking is that the Adani group and Renew Power together account for over half the investments announced during the June 2022 quarter. These were in the power sector and in fact, the new investment proposals during the quarter ended June 2022 were highly concentrated in the private sector.

Public versus Private

Other than this, Vyas points to another dimension of private versus public sector investments. He says, “the share of the private sector in total investment proposals shot up to 90.8 per cent. This is the highest share of the private sector in new investment proposals. In the preceding six quarters, the share of the private sector in total new investment proposals has averaged at about 70 per cent within the range of between 60 and 80 per cent. The over-90 per cent share is therefore a sharp increase from the recent trend. Earlier, the share of the private sector was even lower, at less than 50 per cent.”

However, before we jump to any snap judgement on private sector-driven recovery in investments, he cautions: “First, investments are concentrated in a few large projects and the spread of new investments is still too small. Second, much of the new investment announcements seen in the June 2022 quarter are possibly largely optics in an international event.”

For instance, “a substantial 31 projects envisaging investments of the order of Rs.1.82 trillion were made through Memoranda of Understanding signed at the World Economic Forum in Davos.”

Capital Intensive

Another element that Mahesh Vyas draws attention to is the greater emphasis on capital intensive investments. “Labour force participation is a source of worry and this is not new. India’s investments are mostly into capital intensive industries. All the large corporates are investing into capital intensive industries, which some would read as a clear signal that the trend is not towards hiring as many people as we would want.

Or, as he puts it, “the level of investment is inadequate and the composition of investment is skewed in favour of capital-intensive industry and less in favour of labour-intensive industry and there lies the problem.”

Sliding Rupee

On the slide in the rupee against the dollar and currently a shade under Rs 80 to a dollar (at 79.77), he points out that while the rupee has been depreciating more than what it normally does, the fact remains that some people will get hurt and some would stand to benefit from it. Exporters tend to gain while those importing feel the crunch.

There are however clear reasons why the rupee has been depreciating against the dollar. It is because global interest rates are going up, particularly in the US and the FIIs are moving their money out to geographies where they will get higher returns on their investment. “The risk – return matrix has changed in favour of investments in the US. The large amounts of FIIs going abroad are putting pressure on the rupee. What the RBI does is to intervene to ensure the movement of the rupee is not extraordinarily volatile,” which according to Vyas is arguably the right thing to do at the moment. He however feels, the fall of the rupee should not be a matter of major concern and that it is all linked to how trade and capital flows work out. In fact, some within the Indian industry and even economists have pointed to the slide in the rupee against the dollar to be seen with respect to trade-weighted exchange rate with some arguing that seen from that perspective there may not be reasons for alarm. But then, others have pointed to the dangers of imported inflation that this could trigger and therefore impact the economic recovery prospects.

Pricing In Pain

On inflation, most economist, including Vyas have linked much of the price rise to commodity price increases triggered largely by petroleum price rise. Vyas is however not in favour of any government intervention and in fact some of the economists Financial Express Online spoke to felt that since much of the price increases are on account of snarled supplies, input price rises and some bit of imported inflation on account of rupee depreciation against the dollar, there are limits to which monetary measures could help.

However, with the proverbial man on the street already pricing in pain – with retail inflation at over 7 per cent and wholesale price index staying put in the double-digit zone, apparently any more slippage in job creation and investments, can only trigger fresh set of worries.