Private-investment puzzle

The union government has increased capital expenditure after the pandemic-induced disruption. Aside from supporting demand during the recovery phase, the implicit as sumption was that, at some point, the investment baton would be passed on to the private sector, which will sustain growth.

Althrough the recovery from the pandemic was sharp – partly driven by statistical effects – revival in private investment has remained tepid. It is worth noting that the weakness in private investment goes back to pre – Covid days. Both corporate and bank balance sheets came under significant stress in the years after the global financial crisis. The problem has since been fully resolved and the private sector is still unwilling to invest in a big way.

Prime Minister Narendra Modi has asked Indian companies not to be mere spectators. He argued they should seek global opportunities and accept challenges. Union Finance Minister Nirmala Sitharaman noted that the private sector should talk about what was stopping them from speeding up investment.

Besides higher expenditure on improving infrastructure, the government is doing several things to facilitate investment. It has, for instance, removed over 42,000 compliances since 2014. Over 3,700 legal provisions have also been decriminalised, and the government is continuing to move in this direction.

There could be a variety of reasons why Indian firms are not investing in a big way. The data collected by the Reserve Bank of Indian shows capacity utilisation in manufacturing is at about 75 per cent, marginally higher than the longer-term average. It is typically the level at which firms start contemplating fresh investment to augment capacity.

However, they may be reluctant because of at least two important reasons. First, the global economic environment has been uncertain for quite some time. The uncertainty only increased after the return of Donald Trump as American President. Second there is significant production overcapacity in China, which limits the prospects of increasing exports to Indian companies .

The weakness in investment and overall growth can partly be explained by export performance.

 👇 Please Note 👇

Thank you for reading our article!

If you don’t received industries updates, News & our daily articles

please Whatsapp your Wapp No. or V Card on 8278298590, your number will be added in our broadcasting list.