Having invested in anticipation of the "middle class" materialising and buying their products, companies watched duty rates come down and the middle class "vanish".
The legacy of high leverage, uneconomic capacities and unrelated diversification from the earlier decades took its toll. Companies then had spent the second half of the 1990's selling non-core businesses, cutting costs, sweating assets and looking for newer (read export) markets. This hard work began to show results, and companies started showing improved earnings.
But despite this, companies were not in a mood to invest in capacity creation, just because capacity utilisations had crossed 70 per cent - anecdotally the levels at which they start expansions. Having experienced the pain of restructuring, Corporate India decided that it would be happier to wait for capacity utilisations to go up just a bit more - and cross 85 per cent - before they embarked on additional capacity creation.
My own sense was that this would have begun to happen in 2004, and I did see plans being made, but the elections or rather the election results threw most people off-gear, and they needed to understand the policies of the new alliance at the Centre, and importantly come to terms with the new government, before beginning to invest.
So are more than three Indian companies investing? The answer to this, in contrast to five years ago is, very clearly, yes. Not having invested for most of the last decade, the investment cycle is now being experienced in full boom.
And companies, which a decade ago were happy to spend Rs 50 crore (Rs 500 million), now talk about Rs 500 crore (Rs 5 billion). Well, actually Rs 5,000 crore (Rs 50 billion) - but I have not yet internalised this higher number. So the scale from being local, is now a bit more global. Last year, corporate India announced capex plans of Rs 300,000 crore (Rs 3000 billion) to be invested between 2006 to 2009.
When I look around, it is not just the corporate sector that is now investing - the government is as well. The National Urban Renewal Mission is undertaking a Rs 100,000 crore (Rs 1000 billion) seven-year programme aimed at integrated development of urban infrastructure and urban basic services in over 60 cities in India.
The "mega power projects", continued investment in the national highway developments, proposed railways freight corridors, airport modernisa tion, and so on...the list is breathless! Rather than take a bottom-up approach, and count what each corporate, state government and central government project will add up to, I often hear a top-down story, and my version of this is to ask, "If India is to continue to grow at 8 per cent, what will be the demand for funds?"
The good news is that India is a relatively efficient user of capital. Its "incremental capital-output ratio (ICOR)," has averaged 4.1 over the last five years. The ICOR is the measure of capital needed to produce one additional unit of output.
The economy's growth rate can be calculated as its investment rate divided by its ICOR. So if the economy were to grow at 8 per cent, the current GDP of arou-nd $ 700 billion would rise to $ 950 billion by 2010, and we will need to invest approximately $ 1,025 billion over the next four years.
Should we want to grow at a higher rate (the Prime Minister has asked what we need to do to grow at 10 per cent), we will need to invest still more (or become a more efficient user of capital and bring down the ICOR).
The question then is where will this money come from? Indians are big savers. Currently we save just over 29 per cent of our gross domestic product. Households are the biggest savers, saving 22 per cent of GDP, the private sector 4.8 per cent and the public sector 2.2 per cent.
Although households save 22 per cent of GDP, nearly 53 per cent of this is in the form of physical assets (land, gold, and so on) and the balance 47 per cent in the form of financial assets. Assuming that the savings rate remains constant, the households sector will make available about $ 352 billion over the next four years. Add to this the savings of the private and public sector, and we have another $ 238 billion. Add remittances of another $ 100 billion that we might expect over the next four years, and we are left with a gap of about $ 335 billion over the next four years, to be bridged by the external sector.
Assuming another $ 100 billion comes in from the external commercial borrowings, foreign portfolio and direct investments, leaves us with a gap of $ 235 billion and using the negative current account to fill the gap, we require $ 190 billion over the next four years. The numbers have been rounded-off for convenience, in the above analysis. It can also be argued that the services sector, which has been the impetus for growth, has a lower incremental capital-output ratio.
But I believe these numbers will balance out. The high rate of savings that we have experienced in the past few years - especially public and private sector - are a consequence of the improved performance of public sector (turning from a dissaver of the order of 2.0 per cent of GDP in 2001-02 to a saver of the order of 2.2 per cent of GDP in 2004-05) and the cyclical upturn that the economy has seen.
Should the rate of growth come down, I expect the savings to also fall off a bit, which will imply a larger gap to be bridged. Should stock prices not increase at this rate (it is difficult to imagine that they will continue along this trajectory), the foreign portfolio investments will slow down - and might even turn negative but for a moment ignoring all this, we will need to find, at the very minimum, an ad ditional $ 190 billion or simplistically $ 47.5 billion each year for the next four years.
This can come if we start to save more, attract more foreign direct and portfolio investments, Indians remit more money from overseas, we run higher current account deficit and we bring down the incremental capital-output ratio, all of which needs unleashing of another round of reforms.
The author is Managing Director, Fitch Ratings: India. The views are personal.
