India's economic growth story, while seemingly robust, is facing a significant headwind: a persistent lack of private investment. Despite strong GDP growth, corporate India is exhibiting caution, leading to a subdued investment climate. This hesitancy, evident across both listed and unlisted companies, poses a threat to the nation's long-term economic momentum.
Several factors contribute to this perplexing situation. One primary reason is uneven demand. Urban consumption has softened, and rural recovery is slow. Furthermore, muted exports and cheap imports, particularly from China, are squeezing profit margins in some sectors. Businesses are unwilling to invest unless they are assured of sustained returns, not merely short-term profits. This risk-averse sentiment is further compounded by global uncertainties, including potential trade disruptions.
Another critical aspect is the availability of funds. Ironically, India Inc. is flush with cash, with unlisted companies in a stronger financial position than they have been in decades. Their debt burden is at a 35-year low, with healthy profits and high-interest coverage. However, instead of investing in capacity expansion, many firms are using these funds to refinance older loans or park surpluses in financial markets, earning from passive sources rather than core business activities. This behavior is a stark contrast to previous investment cycles. Non-financial companies are sitting on cash worth around 11% of their assets. The share of passive income, including capital gains, has nearly doubled over the past decade.
Adding to the complexity, a generational shift might also be at play. A growing number of business heirs appear more comfortable managing existing wealth than expanding capacity. This shift in priorities, combined with the usual bureaucratic hurdles such as delays in land acquisition, environmental clearances, and protracted litigation, further discourages private investment.
The consequences of low private investment are far-reaching. Gross fixed capital formation, which includes investments in factories, machinery, and infrastructure, contributes significantly to GDP. A decline in private investment can lead to slower economic growth because a larger fixed capital base is needed to boost economic output. Since 2011-12, private investment has been declining, hitting a low of 19.6% of GDP in 2020-21. The decline reflects fears of high input costs and a slowing growth rate.
Additionally, the Indian Rupee faces a capital inflow problem, becoming increasingly dependent on volatile foreign portfolio inflows. India's net direct investment position has swung from a US$40 billion inflow to essentially zero, creating a hole in India's balance of payments. This shift has made the INR more susceptible to fluctuations.
To revive private investment, a multi-pronged approach is needed. The government must address the issue of weak demand by boosting consumption and creating more jobs. Streamlining regulatory processes, ensuring policy certainty, and resolving land acquisition issues are also crucial. Furthermore, fostering a culture of entrepreneurship and encouraging businesses to take risks is essential for unlocking India's growth potential. Without a concerted effort to address these challenges, India risks losing its growth momentum and falling short of its economic aspirations.
