The interminability of Private Investing In India

Few things have worried Indian policymakers as much as the problems with private investment. In the past decade, its share of economic output or investment rate has declined to levels significantly lower than those recorded in the preceding decade ending 2011-12, when its decline began. Even with a lot of help, like fiscal policy, a lot of structural reforms, and improvements to the business environment, investment hasn't been able to get back to where it used to be. In 2019-20, or prior to the pandemic, gross fixed capital creation dropped by a significant 3.2%. Covid-19 exacerbated the deficit, which is understandable. This is why the fiscal action outlined in this month's budget proposes a significant push through increased public capital expenditures. This is anticipated to bolster the nascent recovery, of which early estimates of national income indicate a modest increase in aggregate investment. Even though business spending has remained unresponsive, the outlook for recovery is optimistic. In this context, a turning point would be an engaging economic narrative.

I think a concise recapitulation would be useful in this context. Up until 2012-13, India's capital expenditures as a percentage of GDP, or investment rate, averaged 39% over a five-year period. The investment was the engine that drove growth rates into the 7.5% to 8% range during that time period. During the "taper tantrum" crisis of 2013–2014, this ratio plummeted by five percentage points; by 2015–2016, it had dropped another 2 percentage points. During the five years preceding the pandemic, the average investment rate was a meagre 32.5%, which was significantly lower than the previous decade and insufficient to sustain the economy's growth trajectory. Consumer demand cannot increase economic output on its own if this catalyst is not reinstated. Investments generate employment and incomes, which in turn stimulate consumer spending, creating a positive feedback loop.

This has not been due to a lack of government support or serious efforts. The list of necessary structural reforms, both large and small, is extensive.??

The transition to a new monetary policy regime and inflation targeting to provide certainty and confidence to investors and businesses; recapitalisation and resolution of bad assets of public banks; the Insolvency and Bankruptcy Code for quick, effective exit of sick businesses; demonetisation to formalise the economy; real estate regulation for transparency and rationalisation; the Goods and Services Tax (GST) to harmonise the indirect taxation system for raising revenues; and GST to harmonise the indirect taxation system for raising revenues a. In addition, infrastructure development has benefited from an increase in public funding.

As we can see, the list, despite not being exhaustive, is astounding. The preceding reforms are contextualized by a look back. The deficit was attributed to 'policy paralysis' (government failure in timely project clearances, mostly infrastructure, resulting in their stalling), 'policy excesses' (lax monetary and fiscal policies), and a failure to implement long-overdue productivity-enhancing structural reforms. Few were aware of the decline in global trade volumes at the time, as well as the strong links between investment and exports that fueled India's economic growth in the first decade of this millennium, propelling it to a trajectory of over 8%.?

The continued lack of private investment is therefore puzzling and cause for concern. The combination of increased public capital expenditures and fundamental changes to the economy has not produced the desired level of investment. Private business participants have remained risk-averse and hesitant to invest capital, particularly in infrastructure.

During the pandemic, public funds for infrastructure development were increased, albeit a portion was eroded by inflation. The impetus for this year's budget, a substantial increase in capital expenditures, is not unprecedented in recent historical context. What will then ignite the fire?

The popular narrative emphasises that specific favourable factors outweigh the opposing forces of a slowing global economy, tighter monetary and financial cycles, and war-related uncertainties.?

There is, for instance, a transformed geo-economic environment that India is well-positioned to exploit: a 6%-plus growth rate in a world where the majority of economies are struggling with either an imminent recession or slowing is attractive placement for firms looking to exit or relocate from China for strategic or economic reasons — the country fills this void well — as well as a geo-political setting in which trade ties are promoted amongst allies based upon shared interests. Other purported innovations include accelerated formalisation promoting new capacity addition; technology-based/driven infrastructures, digitization, improved physical infrastructure, and logistics, among others. As evidence, the responses of leading global manufacturers, such as Apple, to establish production bases in India are cited; additional dividends are anticipated.

In sum, it is believed that the timing and environment are favorable for the success of past reforms, which is bolstered by the public capex increase. As a result, the appetite for business spending is likely to improve. If, in fact, these factors steer an investment drive in a challenging global environment, that would be a significant accomplishment. After multiple economic shocks in the past two years, the return of investment to its former robustness would be the most remarkable and fortunate occurrence if it were delayed for at least a decade. Consequently, this is the most significant feature or story to track this year. The deficit in private investment demand has been India's most pressing economic policy concern for decades.