At a time adverse global headwinds threaten the India growth story, a serious concern for the government is that private investments remain subdued. Not surprisingly, there are regular exhortations to India Inc from the highest levels of the government—especially since it was re-elected in 2019—to overcome its hesitancy to invest. The apex business chambers, for their part, will not tell the government why the animal spirits of entrepreneurs are dampened as they cannot afford to incur its displeasure. Sanjiv Mehta, MD and CEO of Hindustan Unilever and former president of Ficci, argues that the private sector’s risk appetite hasn’t really gone away. “If India keeps growing at 6-7%, then I see no reason why capacity utilisation won’t go up and people will start investing”, he said last week. The majority of a cross-section of industrialists quoted in a report in FE also said they have the intentions to invest and will soon be in action mode, while others remain on wait-and-watch. India Inc misses leaders like the late Rahul Bajaj who, at Bajaj Auto’s annual general meeting in 2019, frankly stated, “There is no demand and no private investments. So, from where will growth come? It doesn’t fall from the heavens.”
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Mehta’s focus on capacity utilisation as an important factor behind the limited appetite for private capex is valid. Utilisation rates during the Covid period indeed hit lows of 60-70%, but whether it is going to further improve is a different matter. Even the chief economic advisor to the government, V Anantha Nageswaran, admitted in his media interviews earlier this year that the average level of capacity utilisation is not at a point where private industry would require additional capacity, adding however that these were higher, at 75-80%, in the top four companies in key sectors like steel, cement, and chemicals. According to RBI’s quarterly order books, inventories and capacity utilisation surveys (Obicus), capacity utilisation did improve in the subsequent quarters from the lows of 47.3% registered during Q1 FY21 due to the lockdown to battle Covid. It slumped again to 60% in Q1 FY22, then recovered to 75.3% in Q4 FY 22 before falling to 72.4% in Q1 FY23. The trend is downward sloping as the Q1 FY 23 numbers are lower than the pre-pandemic highs of 76.1% in Q4 FY19. The upshot is that unless demand for manufacturing goods improves, utilisation rates will not increase and investments as a consequence will not be forthcoming over the near-term.
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A larger point is that a private-investment-led growth also depends 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. Rather than urging India Inc to invest more, the government must implement deep-going structural reforms to free up the land and labour markets. India Inc’s animal spirits then are bound to be rekindled to boost the overall pace of economic expansion. The initiation of such reform has a crucial bearing on the government’s intent to attract foreign investments that are shifting out of China. It is only when these foreign and domestic investments materialise that a virtuous spiral is initiated to sustain a robust growth trajectory despite unhelpful global conditions.
