ExplainSpeaking | India Inc.’s investments: A reality check

Many of the government’s key policy goals — such as, generating more jobs and creating a more formal economy — are linked to private corporations making new investments. This push towards a greater role of the private sector enterprises has been repeated several times by the government ministers and is an essential counterpart of the ‘Minimum Government, Maximum Governance’ promise.

Why and how India Inc. has been incentivised?

Simply put, the idea is to let the private sector take the lead in economic activity — exactly opposite of the model that governments followed during the centralised planning phase before 1991.

To be sure, the idea is not new. The economic reforms of 1991 essentially meant that government and government-owned entities (read Public Sector Undertakings or PSUs) will no longer dominate economic activity, and rules will be liberalised to incentivise greater role of the private sector.

Over the years, one state government after another has organised investment summits that witness companies signing MoUs (memorandums of understanding) worth trillions of rupees. Essentially, these MoUs represent the intentions of India Inc. to invest in new productive capacities.

The current Union government has distinguished itself by ushering several long-pending reforms and demands such as a historic cut in tax rates that corporations pay, streamlining indirect taxation (by the introduction of GST) and the insolvency process (via the Insolvency and Bankruptcy Code).

Greater digitalisation and formalisation were also supposed to help incentivise India Inc. to push up investments. The government even started a subsidy scheme — Production Linked Incentives (PLI) — for India Inc. to encourage them in the initial stages.

So, how far has India Inc. played ball?

Often it is not easy to get a clear answer because investment intentions (which often hog the headlines) are typically far in excess of the actual investments. For instance, if one goes by the investment intentions then CMIE data pegs that to be around Rs 30 lakh crore just for the last financial year (2022-23).

But a new study by Bank of Baroda (a public sector bank) has provided some clarity about the level of actual investments made by companies.

The BoB researchers decided to read the balance-sheet of a large sample of India Inc. for the past five financial years (FY19 to FY23) and compared it to FY18 data.

“We have analyzed balance sheet of 3,420 corporates and looked into the sum of fixed assets and capital work in progress,” states the study released last week.

Madan Sabnavis, Chief Economist of BoB, explained why they did that. “At the end of the day, the balance sheet of the companies provides the authentic number. If companies are actually investing it should show up as expenditure towards either Gross Fixed Asset (GFA) or as capital work in progress (CWIP),” he said. Sabnavis assures that this sample includes all the large companies across different sectors of the economy and that no significant company has been left out.

Further, to get a better understanding of who is investing and in which sector of the economy, the BoB study segregated the companies on the basis of ownership pattern and industry.

The findings are quite noteworthy.

What are the main takeaways?

#1: In absolute terms, in the past 5 years fixed assets of corporates have increased by only Rs 8 lakh crore in the BoB sample (see TABLE 1, Column 1).

TABLE 1: Investment growth by India Inc. lagging far behind

#2: In terms of rate of growth, actual investments by companies grew by just 4.9%; this is half the rate at which the (nominal) GDP grew over the same five years (see TABLE 1, Columns 2 and 3).

#3: Even this modest increase in investments was highly skewed in favour of just a few sectors. Crude oil, power and telecom account for 51% of the fixed asset creation over the past five years (see CHART 2).

#4: Of 3,420 companies in the sample, only 85 were PSUs. However, these 85 companies alone accounted for close to 39% of all the investments.

What is the significance of these findings?

First, this analysis provides a reality check on actual investments by companies as against the promises. Not only are the investments nowhere close to the number that often gets highlighted but, even more importantly, they have not even kept pace with the growth in the economy.

Second, it also lends perspective to India’s growth rate and the tag of being the fastest-growing major economy. Companies are likely holding back because growth in consumption levels is still quite muted. Sabnavis said that while numerically it is true that India has the fastest GDP growth rate but there are fundamental problems such as high unemployment and existing jobs not being productive enough to generate high incomes. This has led to lower than anticipated capacity utilisation levels and, as a result, companies have held back on investments.

Third, whatever growth there is not broad-based as the sectoral break-up shows in CHART 2. Most of the growth in investments has happened in the infrastructure-related sectors of the economy. In fact, 8 out of the 15 major industries have seen a CAGR (compounded annual growth rate) below the 5-Year industry total CAGR of 4.9%.

Lastly, just a handful of PSUs (such as SAIL, NTPC etc.) still continue to account for a large chunk of investments. This is a crucial finding because it points to the lack of transformation that the government was hoping to achieve.

Upshot?

Last year, India’s Finance Minister Nirmala Sitharaman grew exasperated and asked what made India Inc. hesitant about investments.

“Since 2019 when I have taken charge of the finance ministry I have been hearing that ‘ooh, the industry doesn’t think it is conducive to invest’. Alright, bring the (corporate tax) rate down. Tax rate was brought down. And I keep defending the industry, the private sector even when provocatively people have asked ‘what would you like to tell the private sector?’ We would do everything to give industry coming and investing here. ‘Give PLI (Production Linked Incentive)’. We have given PLI. I want to hear from the Indian Inc. ‘What’s stopping you?’ When countries and industries abroad think this (India) is the place to be, now, at this time. FDI (foreign direct investment) are coming, FPI (foreign portfolio investment) are coming. The stock market is so confident. The Indian retail investor believes in them,” she had said. Read this explainer to know more about that episode.

This data analysis explains why the pace of private investments has disappointed the policymakers.

Until next time,

Udit