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Industrial Investment Paradox
Context:
The Index of Industrial Production (IIP) growth fell to a nine-month low of 1.2% in May 2025, highlighting weak industrial recovery despite government measures such as tax cuts, capital expenditure, and monetary easing.
Index of Industrial Production (IIP):
- IIP is a composite indicator that measures short-term changes in the volume of production of a basket of industrial products.
- It is released monthly by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI).
- The current base year is 2011–12, and it covers three sectors: Manufacturing (77.6% weight), Electricity (7.99%), and Mining (14.37%).
Gross Fixed Capital Formation (GFCF):
- GFCF is a component of Gross Domestic Product (GDP) that measures net investment in fixed capital (machinery, equipment, buildings, etc.).
- Despite post-tax corporate profits increasing due to a corporate tax cut in 2019 (from 30% to 22%), private sector GFCF in machinery and equipment grew only 35% over 4 years (FY20–FY23).
- This undermines the goal of increasing manufacturing share in GDP and limits the creation of high-quality formal employment.
Crowding-in vs. Crowding-out Debate:
- Crowding-in occurs when public investment stimulates private investment due to improved infrastructure and demand conditions.
- Challenges to crowding-in:
- High import content of capital projects dilutes domestic demand.
- Long gestation periods of infrastructure projects delay impact.
- Low labor-intensity limits consumption generation.
- Crowding-out risk is less relevant now due to underutilized private investment capacity and ample liquidity.
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