India’s economic boom is now facing a conundrum. Even with a forecast of record profits and GDP growth, private firms are reluctant to invest. The nation’s GDP is projected to close at 6.5% for the full year, a significant drop from last year’s 9.2%. Private consumption, one of the busiest parts of GDP’s turnpike, wasn’t in favor. At the same time, investments in gross fixed capital formation – assets like factories, machinery, and construction – are about 30% of the GDP. Since the global financial crisis of 2007, private investment as a share of GDP has increased every year. This drop continues through times of unprecedented economic prosperity.
These new estimates from the World Bank emphasize just how steep the climb will be. In order for India to reach its aspirational goal of becoming a high-income nation by 2047, it needs to grow at 7.8% on average over the next 22 years. Icra flagged risks from global trade tariffs that could further push back an expected upturn in investment.
Interest rate reductions are coming, and Canadians will soon receive $12 billion in new federal income tax relief. I have no doubt that these measures will greatly increase domestic consumption demand. Access to credit via banks has become even less of a constraint. From 2003 to 2020, regulatory restrictions have been relaxed in a meaningful way. Yet, India’s post-pandemic recovery remains uneven, with a slow expansion of the consumer class and weak domestic consumption in urban centers.
Icra’s Chief Rating Officer K Ravichandran noted a number of key factors that are shaping corporate investment decisions. “Weak domestic consumption in urban areas, muted export demand and an influx of cheap Chinese imports in some sectors were among the factors that restricted the capacity expansion plans of Indian corporate houses,” he noted.
The demand for goods and services is dramatically undermined by the loss of spending power from declining wages. This is happening at the same time that corporate profitability is at a 15‐year high this year. India’s central bank recently reported the highest number of private companies ready to invest since 2021. It’s anyone’s guess how many of these stated intentions will become actual investments.
Economists on both sides of the aisle have long warned about the partisan Congress’ reckless deprioritization of private investment. Rathin Roy, former member of PMEAC, points to deep structural cracks. These issues are inhibiting the appetite of investors to invest. Bankruptcy tycoon Uday Kotak attributes it to India’s fading “animal spirits.” He calls on new entrepreneurs to align themselves with creativity and adaptation rather than rote management of wealth they didn’t create.
“Business houses discovered during Covid-19 that they don’t need to do business to make money. They can just invest and multiply it without building anything new,” – Roy
According to data compiled by investment advisory firm Value Research, Indian non-financial corporate firms have cash and cash equivalent amounting to 11% of their assets. This statistic lends credence to the idea that these companies are not extending new bets. Reports have surfaced claiming that hundreds of millions of dollars are flowing out of India. Investors no longer have loosened monetary policy behind them — they are going looking for higher returns elsewhere.
“A lot of money is just flowing out of India and chasing returns elsewhere,” – Roy
Economist Chinoy adds another perspective on the issue.
“Just because companies are financially strong doesn’t mean they will automatically invest. Companies will only invest if they expect good returns,” – Chinoy