Can Modi and Sitharaman convince businesses to invest in India?
On the Political Cycle, we spoke about ‘Deep State’ explanations for India’s economic slump, and how that both echoes and contrasts with conversations about bureaucrats vs the political leaders in the US and the UK.
Many prominent voices in India have attempted to prod businesses into investing in the economy. A quick search for headlines from over the last four years produces a series of important figures (Prime Minister Narendra Modi, Finance Minister Nirmala Sitharaman, Chief Economic Advisor V Anantha Nageswaran, among others) and a variety of verbs (‘calls for’, ‘urges’, ‘exhorts’) all directed at getting India’s private sector to spend. Sitharaman, in 2022, even relied on a Ramayana analogy, referring to a story from the epic in which Hanuman has to be reminded of his incredible abilities (which he had forgotten as a result of a childhood curse).
That all this needs to be said (exhorted, even) makes it evident that India’s private investment numbers1 over the last decade simply haven’t been adequate. Last year’s GDP shocker, which brought down India’s annual growth forecast and has provoked soul-searching questions about its economic future, makes this concern even more urgent.
Renu Kohli and Kritima Bhapta spell out exactly how bad things are on the private investment front, in a new paper for India Public Policy Review (emphasis added):
“A slack in private investment has persisted for over a decade in India…
According to the latest round, the envisaged total cost of projects funded only by banks and financial institutions significantly increased,from Rs. 2.6 trillion a year ago to Rs. 3.9 trillion in 2023-24, the highest level since 2014-15. Including all financial sources, project costs rose 60%to Rs. 5.6 trillion in 2023-24. Finally, planned investments in 2024-25 are anticipated to increase ~55%to Rs.2.45 trillion.Relative to national GDP however, the intended capex from all financing sources displays a significant fall. At 0.8%of GDP in 2024-25, it is a steep drop from 1.4% last year, which itself only matched up to 2015-16 levels. It is noteworthy that between 2004-05 and 2012-13, the intended investments were in the region of 3-6% of GDP, averaging 4.5% a year. Put differently, the planned investment pipeline in this year is not even a fifth of the past magnitudes, testifying to the extent of the deficit that remains after the post-pandemic demand surge has tapered.”
The paper makes the interesting point that it is not just announced investments that have been steadily falling over the last decade. The ‘intended-realized ratio’ –measuring how many of those announcements turn into actual projects – is also “historically low.” But the big picture is simply that, despite the cheerful story about the fastest-growing major economy, businesses simply aren’t investing.
As The Hindu pointed out recently,
“Data show that two of this year’s first three quarters have recorded a notable sequential decline in private investment plans, particularly by domestic industry. In Q1, private capex plans dropped to multi-year lows, and though the July-September quarter recorded a recovery in investment intentions, that uptick has dissipated in Q3. Projects Today data suggest domestic investments’ value dropped 1.4% from Q2, while new projects’ value dropped over 22% from a year ago as per the Centre for Monitoring Indian Economy.”
None of this is for lack of trying. Indeed, kickstarting the private investment engine has been a key plank of the government’s economic platform, making its failure on this front particularly troubling. In the early years after Modi came to power, the poor investment figures were blamed on massive amount of non-performing assets leftover from the previous era, which were dragging down bank and company balance sheets. Those have been cleaned up and indeed, companies are now sitting on the most robust balance sheets in a decade. After a rough rollout, the Goods and Services Tax system, aimed at creating a common national market, settled into place. (Though the ‘cream bun’ issue remains a significant one).
In 2019, Sitharaman even cut corporate taxes from 30% to 22% for existing companies, meaning the Indian government now earns less from corporations than it does from taxing incomes. And the government chose a public capital expenditure-heavy approach to draw India out of the pandemic, with the express aim of “crowding-in” private investment, citing the ‘multiplier effect’ – the idea that a certain amount spent by the government will go further if it successfully prompts private players to open up their pocketbooks and add to economic output. This has failed to materialise, and is now prompting all sorts of questions about whether the spend-big-on-infrastructure route to haul India out of its pre2- and post-pandemic economic slump.
Pratap Bhanu Mehta writes:
“Investors may not say it openly out of fear or politeness. But privately, even amongst those industrialists who will vote BJP, there is a crisis of confidence in the government. This, ironically, often stems from things the government thinks it is doing well, not just from things it is not doing…
It is no secret that growth has been driven by increases in government capital expenditure. But there are two worries about the nature of this capital expenditure. It is dominated by Roads and Railways. In principle, these are two important items. But there is increasingly a worry that India is doing its capital expenditure more mindlessly…
Unlike the capital expenditure on the Golden Quadrilateral, PMGSY or other road projects, the efficiency and productivity gains from the type of projects we are now funding seem to be far less…. Given how dependent India is on government capex, there has not been, since the Planning Commission was abolished, any analytically worthy assessment of India’s capex priorities and the costs it entails.”
It doesn’t help to see headlines about four different revenue secretaries in four weeks or the government “shifting focus from privatisation to investing billions in ailing Public Sector Units”. And it might be worth remembering that Sitharaman, in 2024, promised a “comprehensive Economic Policy Framework to guide the nation's development” that would “address all factors of production, including land, labour, capital, and entrepreneurship”, and then followed that up with… radio silence.
Sitharaman’s 2025 Budget speech, expected on February 1, will tell us whether the government is willing to acknowledge these fundamental issues, and how it plans to address the vital private investment question. This becomes even more important when considering the signs of a “growing inability of the economy to absorb more public spending.”
Kohli and Bhapta don’t offer a straight-up prescription for what the government ought to do, but they do point in one direction that the Union government (but not the states) has very determinedly chosen not to take:
“Seen collectively, multiple factors – the abundance of policy efforts like recapitalisation, restructuring,and consolidation of banks; interventions like lender-of-last-resort to impart confidence and restore trust; increased corporate savings from productivity improvements, tax cuts,and deleveraging (either held as cash or share buybacks and dividend payouts) – all lend more credence to demand factors as the drivers of unchanging attitudes of private corporates to investments, despite secured capex financing.”
Can’t Make This Up
On this edition of ‘Can’t Make This Up’, two scarcely believable attempts at narrative control.
First, on the economic question, Surjit Bhalla:
“Our GDP growth has surprisingly and inexplicably slowed down. World growth is expanding, even the IMF says so, so why is the global star slowing down?
…
In this article, I want to point to the inexplicable policy of high rates of personal income and overall taxation — a policy I believe is responsible for the slowdown along with our Deep-State-inspired policy of high tariffs on manufactured goods and the same source-inspired policy on the closing of foreign direct investment.
I want to expand on my comment about a deep state. First, who makes policy? Major industrialists, senior IAS babus, and their friendly influencers in the media.”
From the casual use of “surprisingly and inexplicably” to the very obvious omission in the answer to ‘who makes policy’, after 10 years of Modi hai to mumkin hai, the piece is full of jaw-droppers. Vivek Kaul offers a handy response.
Second, is this callous editorial from the Times of India, following the tragic deaths of at least 30 people in the stampede at the Kumbh Mela:
One of the four ‘engines of GDP growth’, alongside public investment, private consumption and exports.
Don’t forget, growth had fallen precipitously right before the pandemic struck, despite much effort to ignore that fact from the government.
Wasted years.