Private sector investments remain the missing link in India’s growth. Latest estimates show private sector capital expenditure fell to a three-year low of 11.2 percent in 2023-24, below the pre-Covid average of 11.8 percent. Worryingly, analysts believe the downward trend will likely continue in the current fiscal, with capex potentially dropping below 11 percent of GDP. This is despite India Inc’s profitability touching near decadal highs. Crisil says corporate revenue growth will likely accelerate to 8 percent in 2025-26 on the back of higher volumes. At the same time, profitability is set to increase for the third successive year on the back of soft commodity prices. However, companies are deploying money to retire debt rather than investing in creating new capacities when capacity utilisation levels are high. Uncertainties due to a volatile global environment and unevenness in domestic demand are also restraining corporates from unleashing animal spirits.
Between 2015 and 2020, investments stagnated at 29.9 percent owing to delays in project execution, the twin-balance problem and a high percentage of bad loans among private and public sector banks. They further fell to a two-decade low of 27.5 percent during pandemic. Though the annual investment rate briefly rose in subsequent years, the anticipated broad-based upswing in private capex remained elusive, reflective of broader challenges in reviving the private investment cycle. A sectoral analysis shows the decline in the investment rate was driven by the services and industrial sectors, whose investment rate fell from 4.3 percent and 6.7 percent in 2022-23 to 3.1 percent and 6.2 percent in 2023-24, respectively.
Undeniably, investment stagnation leads to slower economic growth and higher unemployment rates. As the recent Economic Survey outlined, India needs an investment rate of at least 35 percent to emerge as a developed nation by 2047. But the RBI dashed all hopes, stating that a revival in the private investment cycle would be improbable in the coming year, though Governor Sanjay Malhotra pointed towards strong corporate balance sheets. The government’s recent efforts to restart the virtuous cycle of consumption and employment via capex boost post-Covid failed to deliver. So, it turned to tax cuts and now hopes the recent personal I-T reduction will boost purchasing power, which, in turn, will kickstart private investment.
