Investments shy over growth worries
If it’s not one thing, it’s another holding back private investments. First came the twin balance sheet problem, followed by the slowdown, the Covid-19 pandemic, and now, global uncertainty due to the Russian war, supply chain disruptions, recessionary fears and persistent inflation. Consequently, India’s investment to GDP ratio slipped from a peak of 38% during the last decade to about 10% now. The quarter ended June 2022 saw investment proposals worth Rs 3.57 lakh crore, which is heartening, but this is nearly half that of the preceding quarter, which saw Rs 5.91 lakh crore worth of proposals.
A visibly disappointed Nirmala Sitharaman, who’s been waiting for animal spirits to be unleashed since 2019, when she took charge of the finance ministry, didn’t hold back in asking why industries weren’t investing, despite corporate tax cuts and production-linked incentives, besides others.
She has a point. The balance sheets of both corporates and banks are clean. The corporate debt to GDP ratio slipped to a decade-low, and profitability has increased. The Central government’s Capex spending is on track, while capacity utilisation at over 74% is above the pre-pandemic levels and inching closer to the 2019 peak of 76%. Unarguably, foreign investors and industries see India as an opportune market, while companies moving out of China see India as their next stop. In fact, Bob Sternfels, chief of McKinsey, believes this century belongs to India, not just the decade.
But homegrown companies aren’t entirely in the mood for risk-taking, perhaps, ramming home the point that it isn’t government Capex or low interest rates that drive private investments but durable growth and robust demand. Both are eluding India as of now. India’s per capita income fell below the previous year, and as if the declining purchasing power isn’t enough, inflation is making it worse. And rising interest rates could affect household spending, thereby denting demand further, adding to investors’ uncertainty.
Lastly, businesses prefer smooth compliance and policy stability before embarking on their next investment cycle. Sitharaman may be right in equating India Inc’s abilities to Hanuman’s, who was often reminded of his strengths. But it’s also true that Hanuman was known for holding back his supreme energy and using his might only when the situation so demanded. Even if investors respond to investment appeals, their decisions should be solely guided by market dynamics to avoid the mistakes of the previous decade.