India’s most recent growth numbers were better than expected in large part due to rising investment. But a chunk of this is due to the government’s capex push, with private investment yet to take off meaningfully across the board.
With capacity utilisation in the manufacturing sector rising above 75 percent, there is evidence of revival of private investment in certain sectors, according to Reserve Bank of India (RBI) Governor Shaktikanta Das.
Echoing Das, Chief Economic Adviser V Anantha Nageswaran recently said that private sector investment had begun to unfold at a steady pace and fresh investments have become imminent in sectors such as steel and cement.
The much-awaited revival in private investments was due to happen as manufacturing companies had used the recent pandemic years to deleverage their balance sheets by eschewing fresh investments even as banks were pushed to clean up their books by writing off non-performing assets.
“Private investment is showing signs of a pick-up, particularly in engineering and capital goods, in companies engaged in railway contracts and supply of technology and equipment, and in services sectors like hotels and transport,” Deepak Sood, Secretary General, ASSOCHAM, told Moneycontrol.
“In May, India's manufacturing PMI rose to a 31-month high, confirming a revival in key sectors of the economy. With further macroeconomic improvement, the trend is expected to continue, helped by tailwinds like softening of raw material prices,” Sood added.
The January-March quarter recorded the highest-ever commitment of fresh investments totalling Rs 14.6 lakh crore, led by private sector outlays that hit a record high of Rs 10.5 lakh crore, according to data by Projects Today as reported by The Hindu. This took the last fiscal year’s investment commitments to Rs 37 lakh crore, compared with Rs 19.27 lakh crore in the previous year.
It must be noted that these are project announcements and not actual investments, which often lag the stated numbers.
Despite signs of a recent uptick, private investment has seen a decline in the past few years amid multiple economic shocks, and as the economy seeks to achieve a greater degree of formalisation.
India’s gross fixed capital formation in the private sector as a percentage of GDP declined to 22 percent in 2020 from 31 percent in 2011, according to World Bank data.
Also read: Investment more than consumption leading India's economic growth: Economists
What is working
Prime Minister Narendra Modi’s government unveiled a growth-oriented budget for this financial year with a record capital expenditure outlay of Rs 10 lakh crore. The government has in recent years raised its capital spending substantially, aimed at enhancing the growth potential of the world’s most populous country that seeks to become a developed economy by 2047.
In 2019, the government had slashed corporate tax rates. Over the last two years, India has also offered incentives on incremental sales to boost local manufacturing in a host of sectors ranging from automobiles, white goods, and pharmaceuticals, to solar photovoltaic modules.
The programme is part of New Delhi’s broader goal to help reduce imports and boost exports of manufactured products, in an attempt to secure a foothold in the global supply chain that is shifting from China following the pandemic.
According to research by the RBI, the government’s focus on capital expenditure in the recent budgets could be effective in stimulating private investment and domestic demand, with beneficial effects accruing over time. The RBI has shown that for public investment, the multiplier on private investment is 1.2 and on the GDP it is 1.7, over a three-year period.
Sectors like engineering, infrastructure (ports, airports, highways, etc.) are witnessing an uptrend in investment, Sood said.
“Railways have been on a solid growth trajectory with the government leading the investment, crowding in private investment,” he added.
Also read: India's impressive GDP data has some puzzling elements
What’s holding back investments
The industry has been facing a raft of uncertainties that have held back fresh investments.
During the pandemic, the lack of demand forced a wait and watch stance. Then, the Ukraine crisis caused a spike in energy and commodity prices, pushing manufacturers to avoid investing in new capacity. Subsequently, inflation and monetary tightening led to caution.
“I still think there is a huge resistance towards investing in capacity expansion, especially by companies in the small and medium sector,” said Saket Dalmia, President, PHD Chamber of Commerce and Industry. “Is it because of uncertainty of demand? Is it because ease of doing business hasn’t really panned out as expected? Is access to capital becoming more difficult? Is working capital tighter? I think it is all of these.”
While larger companies’ balance sheets may be debt-free and access to finance easier and cheaper, micro, small, and medium enterprises are facing the brunt of formalisation of the economy, which is raising their cost of doing business, he said, as banks are reluctant to lend to smaller companies and interest rates are high. Moreover, price of industrial land has risen substantially, and larger companies are eating into the share of smaller firms.
“That does not mean I'm sceptical about the future,” added Dalmia.
While global macroeconomic and financial uncertainties could cloud the outlook for domestic and overseas demand, India needs to go deeper into the supply chain of components and sub-components so that industry scales up from assembly of products to manufacturing across the supply chain, Sood said.
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