NEW DELHI: Despite tax cuts and incentives, private investment hasn’t really taken off in the country. Though the government has increased its capital expenditure by three times since FY20, private sector has been slow in investing. So what are the reasons behind this slow investment by the private sector? According to the World Bank, private gross capital formation was 22% of GDP in 2022. They used to be as high as 25-26% of GDP in FY14 and FY15.
Many factors –both domestic and global -- are responsible for this lacklustre investment by corporates. First of all, China’s monopoly in the manufacturing sector can’t be denied. It has always been cheaper to import from China. So, in that scenario, the private sector never needed to put investment in the country.
In addition, investment is majorly driven by demand. Consumption was already low among the rural and middle class, and it got further exacerbated by Covid pandemic. Though there has been some recovery in demand now but that too among the rich and higher middle class. Inflationary pressure on account of Covid and geopolitical tensions between Russia and Ukraine also played their part in worsening the demand situation.
“Investment as measured by gross fixed capital formation has decreased from 37% of GDP to 31%, while the goods export had been hovering around US$ 300 billion since 2011-12 till 2019/20. Only last fiscal exports got a boost due to covid induced boost to demand for goods, inflation...and we got carried away. Now things are normalizing, and goods exports have started to stagnate. Weak exports and slowing private consumption will dampen sentiments on private investment,” Ritesh Singh, economist and founder of Indonomics Consulting Pvt Ltd said.
Private consumption remains a drag
Undoubtedly, domestic consumption remains the backbone of the Indian economy as exports not doing well and private investment remains sluggish, Singh added.“Practically speaking government capex is just 8-10℅ of overall investment in the country and can only nudge but not push the needle. We have seen private infra based industries do well in investment. But the big push must emanate from consumptipn which is lagging in terms of leading to enhanced capacity utilization. Morejobs have to be created leading to more income,” Madan Sabnavis, chief economist with the Bank of Baroda (BoB) said.
He added that the GDP growth is not generating enough jobs. The government is doing its work but it has fiscal constraints.
According to the Economic Survey, in the first decade of the new millennium, the credit boom financed rising levels of investment rates. Consequently, by the time, the second decade began, balance sheets of both the companies and banks became stressed. As a result, corporates switched focused from investment to deleveraging while banks slowed credit disbursement in view of high non-performing assets. Consequently the investment rate declined and the economy began to slow.
Meanwhile, the political landscape and economic policies of the government also drive the investment. Countries with stable governments, good public infrastructure like roads, electricity, gas and water, business friendly policies that protect the rights of business enterprises attract more investment and businesses.
“Currently, private investment is not taking off because of the Covid pandemic and other geopolitical tensions. Also, before Covid, global financial crisis in 2008 spilled over to other emerging economies. Policies of advanced countries have not been conducive to other countries. Then the monopoly of China and America on the defensive also affected private investments,” stated Charan Singh, Economist and the chief executive officer of EGROW foundation.
Crowding-in effect of govt spending?
The government is making all the efforts to attract private investment in the country. Higher capex, tax cuts, PLI schemes to boost manufacturing and other incentives are some of the measures taken by the government to boost private investment in the country. But capital spending by the government is a slow process and growth is also not generating enough jobs which will in turn boost consumption.
According to economists, high public investment in capital infrastructure ideally should crowd in private corporate investment . However, it’s not instantaneous. The impact of capital infrastructure is always lagged.
"We have emphasised on high public investment only in the last budget. The macroeconomic uncertainties on the external front like China, US Fed rate policies and increased protectionist policies also significantly affect private investment decisions," Lekha S Chakraborty, Professor at the National Institute of Public Finance and Policy, said.
However, things are looking good now despite several shocks like Covid, inflation and supply chain disruptions. According to the economic survey, for the first half of FY21, FY22 and FY23, private investment numbers in nominal rupee terms have been increasing. So, once the shocks dissipate, India’s credit and capex cycle will gather more steam than what we have today.
Many experts now hope that the production-linked incentive (PLI) scheme may rejuvenate private investment.
Senior Director of CRISIL MI&A Suresh Krishnamurthy says: “Overall industrial capex is seen rising to nearly Rs 5.7 lakh crore on average between fiscals 2023 and 2027, compared with Rs 3.7 lakh crore in the past five fiscals. Nearly half of this incremental capex is being driven by the Production-Linked Incentive (PLI) scheme and new-age sectors.”