Incremental capital-output ratio or ICOR has been one of the persistent preoccupations and subjects of debate among economists in India for nearly forty years, observes Prosenjit Das Gupta in ‘Eco-Yatra: Traversing the path of India’s economic change for the last six decades’ (www.tatamcgrawhill.com). For starters, ICOR, calculated as annual investment upon annual increase in GDP, is used predominantly in determining a country’s level of production efficiency, as www.investopedia.com instructs.
Fruitless investment
This basically comes down to a choice whether it would be better for the country to invest Rs 1 lakh and get an additional output stream of Rs 50,000 per annum for 10 years, or would it be better to go for a yield of Rs 35,000 per year for 15 years, the author illustrates. He is not happy, however, that the decision-making in the country often failed to examine and identify the operational mechanisms by which the investment turns quite fruitless. “From the Olympian heights at which the planners often worked, these operational details seemed insignificant, or worse, irrelevant. The devil was in the detail.”
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The book cites Dr Sukhamoy Chakravarty, who highlighted the relatively high level of ICOR in practically every sector in India, be it agriculture (where it ranged from 2.18 during 1951 to 1960, to 3.17 by 1983-84) or manufacture (where the range was from 4.47 in the 1950s to an unacceptable 14.36 in 1983-84).
“In other words, it would take Rs 3.17 investment in agriculture in 1983-84 to get an additional output of just Re 1; or Rs 14.36 investment in the 1980s in manufacture to derive an additional output of Re 1.” It was as if the country had to run faster to stay in the same place, the author frets. In spite of the heavy public investment for three decades, the sectoral rates of GDP growth remained what may politely be termed modest, he notes.
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Among the reasons that contributed to the adverse situation were the reliance on government-to-government aid restricting the type of projects and also requiring purchases of plant and equipment from the aid-giving country, protracted negotiations to fructify, and built-in inflation of cost at higher-than-market prices. Also, the equipment in question was often not the latest and the most modern, and the replacement or maintenance was expensive.
Thankfully, with a liberalised thinking came to the fore newer benchmarks such as return on capital employed, earnings per share and so on. “More people were realising that economic decisions were not risk-free, and the old practice of pointing the finger at government for every error or judgment, and expecting government to bail out for every such error, was no longer applicable…”
Suggested study for the finance professionals.
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