At a time of adverse global headwinds due to elevated policy-related uncertainties, a private sector-led investment push will no doubt bolster India’s gross domestic product (GDP) growth. The question naturally is whether or not a virtuous capex upswing has kicked in. The official data highlights the continued subdued growth in private investment last fiscal. So, too, does the data of the Centre for Monitoring Indian Economy. The finance ministry’s latest monthly economic report hopes that “if the private sector were to invest in the economy, banking on the resilience of the Indian economy and its steady growth outlook, it would overpower the risks to the growth outlook considerably”. The not-so-good news in this regard is that the portents for an upswing in the private capex cycle do not appear bright. Last fiscal, private sector capex fell by 9% on year. It was also the second straight year of negative growth. As if all of this were not bad enough, there was a significant and sustained drop in the rate of completion of projects.
Clearly, the private corporates are not driving the India growth story as they did earlier, which does concern the policymakers. Budget 2025 unveiled massive tax reliefs for the urban middle class to stimulate higher consumption to nudge an upswing in private investment-led growth. This did not enthuse fast-moving consumer goods companies who felt that only half the tax savings will be spent on essential and discretionary purchases as the middle class utilises the amounts to pay off loans or save. The government nevertheless hopes that industry recognises the endogeneity of its investment spending and consumption demand. However, despite exhortations at the highest levels to India Inc to overcome its hesitancy to invest, a virtuous spiral has so far been elusive.
The corporates are not driving overall growth because there is still a lot of excess capacity. In manufacturing, capacity utilisation rates fell to 74.2% in Q2FY25 from 76.8% in Q4FY24. They need to go up much further to a point where private industry requires additional capacity. “The demand environment remains challenging and capacity utilisation is not optimal at the moment. So, companies will be circumspect,” stated Nadir Godrej, chairperson, Godrej Industries Group. Of course, the situation is nuanced across various industries. In automobiles, electronics, renewable energy, and steel, for instance, leading players are making plans for big-ticket investments. So, too, are the business conglomerates in the country. State-level investor summits are also driving record levels of investment commitments by India Inc. Nevertheless, the fact remains that a broader private capex upswing is only likely further down the road.
More generally, private investments depend on a more stable policy and regulatory framework. A cyclical upswing cannot be set in motion so long as investors, both domestic and foreign, face serious difficulties in doing business on the ground, especially in the various states. “Getting out of the way” is imperative, to borrow an expression of the latest Economic Survey. Investors need a non-adversarial and transparent tax regime. Perceptions of tax terrorism and misuse of the enforcement machinery only dampen investments. Above all, the government must implement deep-going structural reforms to free up the land and labour markets. India Inc’s depressed animal spirits then are bound to be rekindled to support the overall pace of economic expansion despite the unhelpful global economic conditions.