A recent analysis reveals that Indian private firms are choosing to hoard cash rather than invest, despite a sharp rise in profitability. Factors such as weak domestic demand, global uncertainties, and socio-economic trends of wealth management over active business growth are contributing to this investment stagnation.
Why India's Booming Profits Aren't Leading to Increased Investment
Why India's Booming Profits Aren't Leading to Increased Investment
Despite reporting record profits, private investment in India's economy has dipped to a decade low, prompting concerns from economists and policymakers.
Article Text:
What will it take for India's private companies to start investing in new infrastructure? This ongoing dilemma has puzzled policymakers as private sector investment remains stunted, with expenditure dipping to a decadal low of 33% as part of overall investments in the economy this fiscal year, according to recent data from a prominent ratings agency. Despite experiencing robust economic growth rates, private investments have been on a downward trend since the global financial crisis of 2007.
Although there was a slight upturn in investments in 2022 and 2023, a comprehensive analysis of 4,500 listed and 8,000 unlisted firms indicates that while listed corporations are investing less, unlisted firms are actually scaling back their efforts. Concerns regarding this slowdown have been voiced by various economists, with banking magnate Uday Kotak questioning the dwindling "animal spirits" among business owners, urging them to move beyond just managing inherited wealth.
Indeed, data from an investment advisory firm highlights that non-financial businesses are currently retaining nearly 11% of their total assets in cash, suggesting a hesitation to reinvest. Factors limiting corporate investment plans include weak urban consumption, lackluster export demands, and an influx of cheap Chinese imports, all of which have stifled expansion capacities.
On a broader scale, India's economic survey alongside Icra's analysis points out that global uncertainties and existing overcapacity have dampened the private investment impulse. This poses a threat to the nation's growth trajectory, with investments—defined as gross fixed capital formation—accounting for approximately 30% of GDP, the second largest contributor following private consumption.
With forecasts indicating a deceleration in GDP growth from 9.2% to an expected 6.5% for full-year estimates, the imperative for rejuvenating private investment becomes clear. The World Bank estimates that to achieve the high-income status ambition by 2047, India will need to sustain an average growth rate of 7.8% over two decades, requiring the scaling of private and public investments to at least 40% of GDP from the current 33%.
Despite government measures—such as increased infrastructure spending, significant corporate tax reductions, and production-linked subsidies—corporate India has not responded with the desired expenditure. JP Morgan's Chief Economist for India, Sajjid Chinoy, highlights the core issue as the insufficient demand justifying new capacities. The post-pandemic economic recovery has been uneven, particularly in expanding the consumer class, which has curtailed spending capacity.
Furthermore, former PMEAC member Rathin Roy pointed to deeper structural issues, noting a general lack of entrepreneurial drive to innovate or create new demand. Shifting perspectives toward wealth management rather than business building, highlighted during the pandemic, have exacerbated this trend.
Yet, the narrative isn't entirely bleak. Icra suggests that interest rate cuts and fiscal relief aimed at enhancing domestic consumption may signal a potential shift. India's central bank reports a positive trend with increased intent among private firms to invest this year compared to last, although actual deployment of funds remains uncertain amid ongoing global trade ambiguities.
What will it take for India's private companies to start investing in new infrastructure? This ongoing dilemma has puzzled policymakers as private sector investment remains stunted, with expenditure dipping to a decadal low of 33% as part of overall investments in the economy this fiscal year, according to recent data from a prominent ratings agency. Despite experiencing robust economic growth rates, private investments have been on a downward trend since the global financial crisis of 2007.
Although there was a slight upturn in investments in 2022 and 2023, a comprehensive analysis of 4,500 listed and 8,000 unlisted firms indicates that while listed corporations are investing less, unlisted firms are actually scaling back their efforts. Concerns regarding this slowdown have been voiced by various economists, with banking magnate Uday Kotak questioning the dwindling "animal spirits" among business owners, urging them to move beyond just managing inherited wealth.
Indeed, data from an investment advisory firm highlights that non-financial businesses are currently retaining nearly 11% of their total assets in cash, suggesting a hesitation to reinvest. Factors limiting corporate investment plans include weak urban consumption, lackluster export demands, and an influx of cheap Chinese imports, all of which have stifled expansion capacities.
On a broader scale, India's economic survey alongside Icra's analysis points out that global uncertainties and existing overcapacity have dampened the private investment impulse. This poses a threat to the nation's growth trajectory, with investments—defined as gross fixed capital formation—accounting for approximately 30% of GDP, the second largest contributor following private consumption.
With forecasts indicating a deceleration in GDP growth from 9.2% to an expected 6.5% for full-year estimates, the imperative for rejuvenating private investment becomes clear. The World Bank estimates that to achieve the high-income status ambition by 2047, India will need to sustain an average growth rate of 7.8% over two decades, requiring the scaling of private and public investments to at least 40% of GDP from the current 33%.
Despite government measures—such as increased infrastructure spending, significant corporate tax reductions, and production-linked subsidies—corporate India has not responded with the desired expenditure. JP Morgan's Chief Economist for India, Sajjid Chinoy, highlights the core issue as the insufficient demand justifying new capacities. The post-pandemic economic recovery has been uneven, particularly in expanding the consumer class, which has curtailed spending capacity.
Furthermore, former PMEAC member Rathin Roy pointed to deeper structural issues, noting a general lack of entrepreneurial drive to innovate or create new demand. Shifting perspectives toward wealth management rather than business building, highlighted during the pandemic, have exacerbated this trend.
Yet, the narrative isn't entirely bleak. Icra suggests that interest rate cuts and fiscal relief aimed at enhancing domestic consumption may signal a potential shift. India's central bank reports a positive trend with increased intent among private firms to invest this year compared to last, although actual deployment of funds remains uncertain amid ongoing global trade ambiguities.
