Boosting corporate investment in India

The quarterly growth rate in investments in India has contracted for second consecutive quarters (Jul-Sep 2011 and Oct-Dec 2011). This has not happened in a while and even during Lehman the decline was for just one quarter (Oct-Dec 2008). Hence, we are looking at much worse times now than even seen when the global crisis got worse.

Kiichi Tokuoka reflects on this decline in investment in this paper and suggests ways to boost it. He says apart from improving macro environment some micro measures like improving financial access, improving doing business rankings etc.

Since the global financial crisis, corporate investment has been weak in India. Sluggish corporate investment would not only moderate growth from the demand side but also constrain growth from the supply side over time.

Against this background, this paper analyzes the reasons for the slowdown and discusses how India can boost corporate investment, using both macro and firm-level micro data.

Analysis of macro data indicates that macroeconomic factors can largely explain corporate investment but that they do not appear to account fully for recent weak performance, suggesting a key role of the business environment in reviving corporate investment.

Analysis of micro panel data suggests that improving the business environment by reducing costs of doing business, improving financial access, and developing infrastructure, could stimulate corporate investment.

Much of this is pretty much known but the author puts numbers as well. For instance:

The results imply that improving the business environment could boost corporate investment substantially. The estimated coefficients in Table 2 and in columns 1–4 of Table 4 mean that reducing the average of each cost of doing business to the lowest among Indian  cities surveyed in 2009 could boost aggregate demand by ¼ to 1½ percent of GDP, by raising corporate investment by 3 to 13½ percent of GDP (Table 5). Of the various business costs, lowering the average costs to export is estimated to be the most effective and could  increase GDP by 0.1 to 0.6 percent. Reducing the average of each of the other costs to the lowest could raise GDP by 0.03 to 0.4 percent each. These results should be interpreted with caution, as just cutting the costs included in the staff analysis may not be nough to produce the growth effects reported in Table 5. This is because the costs of doing business are correlated with other business-environment-related factors (e.g., product market regulation, education, skills) and the staff’s estimates may have picked up the effects of such omitted factors.

So you have some numbers while suggesting things like India should improve its doing business rankings etc..


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