Over the past decade, the Modi government has implemented a series of bold reform measures to encourage private sector investment in India. Among others, that include cleaning up bank balance sheets, slashing corporate tax rates, ramping up government capital expenditure to crowd in private investment, hiking import duties and rolling out Production-Linked Incentive (PLI) subsidies to support manufacturing.
To incentivise private capex from the demand side, the government has exempted individuals with income below Rs 12 lakh from the application of income tax and also lowered GST rates to boost demand.
Broad-based private capex revival hasn’t yet set in
Yet, despite India’s impressive 7-8% GDP growth and a rapidly expanding consumer market, a broad-based revival in private capex remains elusive. This hesitation threatens India’s growth trajectory, limits job creation, and risks making government spending the primary engine of expansion rather than private investment despite the larger size of the private sector.
It would be interesting to analyse what’s holding back private capex? What are the reasons behind the persistent reluctance of India Inc to invest at scale?
Supply side issues
Measures to support basic industries such as steel through a combination of import curbs — through hike in import duties and enforcement of quality control orders (QCOs) to block competitively priced imports — have helped capex in the steel sector, but it has led to increased costs and in turn lower operating margins in steel using downstream industries, including thousands of MSMEs. That adversely affects overall private capex growth.
It’s not difficult to understand that expensive steel (a common industrial input) will raise the cost of all downstream manufacturers starting from automotive to capital goods, making them price-uncompetitive both in domestic as well as third-country export markets.
Policy makers should realise that import taxes on inputs are also a tax on exports.
Weaker rupee is a better tool than Import Duties
To protect domestic manufacturers from cheap or dumped importers, a weaker rupee is a better policy instrument as it simultaneously discourages imports and incentivises exports in a non-discriminatory and transparent manner unlike opaque import duties and QCOs.
The recent roll back of 80 (out of 750) QCOs, mostly related to steel (55), chemicals (14) and non-ferrous metals (8) is therefore a good move to support much more value-adding downstream industries.
Suffocating compliance burden
Beyond input costs, compliance adds another layer of complexities hampering private investment. To curb tax evasion and promote formalisation, the government has been adding filing and reporting requirements which are well-intentioned. But that is leading to a compliance nightmare for all kinds of smaller business entities, many of them are part of the country’s formal sector, though with fewer employees than large corporations.
Despite the promise of one nation, one tax, businesses need state-wise GST registration. Thus, a firm must have a registered office in each state which would be costly for any small business operator. No wonder, MSMEs are losing market shares and that’s bound to affect India’s overall capex growth.
The Registrar of Companies (RoC) has made it really easy to register a company. But if someone wants to change its registered address from one state to another due to change in business dynamics, it’s too cumbersome. Because of that, a company may have a registered address in Maharashtra but its employees might be based in Bangalore (Karnataka) or even outside the country, say in the US where the client might be based.
In its latest directive, the Registrar of Companies (RoC) has instructed the director of a company to visit the company’s registered office and take a photograph of the premises. The photograph must clearly show the external building and the company’s name, along with the director appearing in the same frame. Additionally, the image must be geo-tagged using a specific mobile app before being uploaded on RoC website latest by 31st December when most people could be out on vacation.
Similarly, closing down a loss-making company even if it has no employee, except the owners-directors is extremely difficult. As micro, small and medium enterprises (MSMEs) tend to be more labour intensive than large corporations, the result is slower job-creation and this is bound to affect demand and in turn private capex.
RoC should act as a business facilitator and make registering, relocating from one state to another, and closing down operations easy to encourage entrepreneurship. Similarly, the GST Council should aim at cutting compliance burden to help private capex - one easy fix is an introduction of national GST registration.
Demand side issues
Inequality of income and wealth has always been a problem, but it has worsened between 2014 and 2024 as highlighted by World Inequality Report, 2026.
As the affluent households have lower marginal propensity to consume vis-a-vis poorer households, this is adversely affecting demand generation and in turn, private investment. Experts and economists opine that lowering interest rates will boost capex. However, despite RBI lowering benchmark interest rates by 125 basis point since February, private capex revival still remains uncertain. It’s worth mentioning that the cost of funds or interest rate is one, though important, of the many factors that determine private capex. But the ability to recover investments with reasonable profit is even more important and that underlines the significance of demand - so rate cuts won’t be enough. India had fastest private capex growth in the period 2003-07 when real interest rates were high.
The solution, therefore, is to boost employment and in turn consumer demand to incentivise private capex. What India needs now is an employment-linked incentive scheme, after recent rationalisation and reforms of labour laws to encourage private investment. Lowering GST was a positive step to boost consumer demand, but without ITC for items covered by 5%, it will not lower prices, needed to give a real demand boost to the Indian economy. For instance, hotel accommodation below Rs 7,500/night, applicable GST is 5% but without ITC.
To conclude, amid global trade uncertainties and the slow progress of the India-US trade deal, domestic demand must play a larger role in supporting private capex. This requires lower effective taxation on consumption to encourage private capex from the demand side. While reducing the cost of capital would help, easing the compliance burden—particularly for MSMEs—is essential to boost private capex from the supply side. The upcoming Union Budget 2026 presents a big opportunity to address these priorities.
(Views are personal, and do not represent the stance of this publication.)
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