NEW DELHI: Despite the Government’s thrust on capex, the private sector is not very enthusiastic about capacity expansion in the country. Many factors, particularly global uncertainties, are the main reasons behind the lackluster growth in private investment.
Private investment has picked up from the lows of 2016 and 2017 but it is yet to reach the levels achieved during 2011-12. According to the government data, private investment at both the current and constant prices was 27% of the gross domestic product (GDP). However, in 2016 and 2017, it plunged to 21.3% of GDP at current prices. In constant prices, it stood at 22.7% of GDP in 2016 and 23.2% of GDP in 2017. Then, in 2023 it gradually picked up to 23.8% of GDP at current rates and 25.7% of GDP at constant rates.
“We observe that the investment as a % of GDP at constant prices is much higher than investment at current prices and the difference has increased substantially during the recent years. Inconsistency is being driven by the variation in GDP deflator. Given that the households and corporations base their decisions on nominal numbers, I prefer to use nominal numbers for assessing the progress we are making in building capacity for growth,” said Anil K Sood, professor and co-founder, Institute for Advanced Studies in Complex Choices (IASCC).
Private investments include both investments by corporations as well as households.
According to Sood, private corporation investment has recovered better than the households, but they are investing in dwellings and buildings and not machinery equipment or IP assets. Equipment and IP investment is considered to be relatively riskier. Lower investment in equipment and IP is also explained by the fact that office and commercial construction are driving growth in the real-estate sector.
Arvind Virmani, member of NITI Aayog, differs from those who think private investment is not picking up. According to him, private investment seems to be slowing down majorly because of moderate rise in the prices of plant and machinery.
“Price of capital/investment goods is rising slower than that of the GDP. When the ratio of the current prices of investment to GDP like machinery and equipment and structure is declining much less than with that at constant prices, then it means that the price of the capital goods is going down in real terms divided by the general price level,” Virmani said.
Signs of pick-up
According to Charan Singh, who is an economist and founder of EGROW Foundation, the possible reasons for the slower private investment growth could be increased uncertainty, global geopolitical issues, and high interest rates. However, he also points out a positive trend in credit off-take in the Mudra and MSME segments due to the digital revolution and the success of initiatives like the Jandhan Adhaar (JAM trinity).
“The share of NBFCs in the overall credit is also expanding. The recent data revealing high monthly private consumption expenditure and robust growth rate cements the fact that the quality and size of investment needs to be examined in more granularity,” Singh said.
Some sectors like steel and hotel and tourism are showing sign of investment expansion. JSW steel is planning to expand its capacity to 50 million tonne by FY31 from the present capacity of 25.70 million tonne, while SAIL is all set to expand its capacity to 35.6 million tonne by FY31 from the present capacity of 20.632 MT.
According to ICRA Ltd, there has been a notable increase in demand, leading to a rise in supply announcements and the revival of postponed projects in the hotel and tourism industry over the past 18-24 months.
The premium hotel supply outlook for the upcoming years has seen a significant increase due to new agreements and the entry of global brands into the Indian market. However, the growth in supply is projected to be slower than the growth in demand.
“Sizeable supply announcements are seen in tier-II leisure, business, and religious destinations. There is also an increase in per-room construction cost by 20-25%, with cost inflation, compared to pre-Covid levels,” said ICRA.
Arvind Virmani, member, Economic Advisory Council of Prime Minister (EAC-PM), says that the private investment has now begun to pick up and it will only go upwards in the next five years. “The government has raised capital expenditure by almost 30% a year, which has given a boost to the economy. The multiplier of capex is 2.5 times. This is why we have grown over 7%,” says Virnami, adding that capital expenditure crowds in investment.
High cost of capital
Both Virmani and Singh concurred that interest rates are high due to global uncertainties. Though the manufacturing sector is open, the industry is interlinked with the outside world also, so they have to worry about what everybody else is doing. “My view is that both these factors will become less severe over the next year starting April. If my analysis is right, global interest rates will decline over the next year, and also the global uncertainty will go down, therefore, the corporate investment will increase,” Virmani added.
As per Lekha Chakraborty, Professor with National Institute of Public Finance and Policy, high fiscal deficit in India is tied to high capex to attract private corporate investment. India has introduced Insolvency and Bankruptcy Code to restructure the ailing industries. Moreover, bank recapitalisation has been done to provide capital adequacy to the private corporate sector when there was a twin balance sheet crisis - mounting the corporate debt and the bank’s balance sheet. Despite all these reforms, the private sector is shy because of macroeconomic uncertainties and risks. She said that the Centre is on track focusing on capex to attract private corporate investment, and the results will not be instantaneous, but with a lagged effect.
Falling FDI
Foreign direct investment (FDI) in India has been falling since 2021-22. It fell from $59 billion in 2021-22 to $46 billion in 2022-23. In the first 9 months of the current financial year, FDI has seen a 13% fall to $32 billion. With regard to foreign investment, Virmani said the share of emerging economies in total investment has declined and that of the developed world is rising. As far as India’s share in emerging market is concerned, it hasn’t gone down, rather it has increased.
“FDI has done reasonably well in India in the last ten years. The centre is making efforts in terms of product linked incentive scheme (PLI) and free trade agreements (FTAs). These are two arms of its strategy to make sure we get FDI, which is related to supply chain, because again the multiplier effect is better as we will get more skilling, employment,” stated Virmani.
