What's stopping India Inc from turning on the investment tap?

At a time when foreign investors are showing confidence in India’s growth story, what is holding back Indian firms from coming forward and making investments, Union Finance Minister Nirmala Sitharaman asked on Tuesday.

The answer, according to analysts, is that Indian businesses are not confident about the durability of the demand recovery. Add to that the prevailing external headwinds and one gets a clear picture of what’s stopping firms from increasing investments.

Investments by India Inc have slowed down with the growth rate of gross block formation of Indian companies falling to single digits in the last two years as the pandemic hit consumer demand.

Private final consumption expenditure, or PFCE, rose 13.5 per cent in the first quarter of FY23. Also, it was almost 10 per cent higher than the corresponding pre-Covid period of FY20. PFCE denotes demand in the economy. However, India Inc is not certain that demand will continue to gather momentum because retail price inflation has remained above the Reserve Bank of India’s tolerance level of six per cent for the eighth consecutive month in August.

Ranen Banerjee, the leader for economic advisory services at PwC India, told Business Standard that there was lower appetite for investing to build capacity because economic headwinds had caused the private sector to have little confidence in the sustainability of demand.

He also blamed the combination of the pre-Covid slowdown, the Covid shock, and the current global growth challenges emerging from the ultra-tough monetary stances adopted by central banks. Banerjee also said that the benefits of the cut in corporate tax rates were used by businesses to deleverage their balance sheets.

ICRA Chief Economist Aditi Nayar said that high commodity prices, geopolitical uncertainties, and uneven consumer demand were likely to have prompted India Inc to defer their capital expenditure plans in spite of healthy capacity utilisation in the fourth quarter of FY22.

According to the RBI’s OBICUS Survey, capacity utilisation in the manufacturing sector rose to 75.3 per cent in the fourth quarter of FY22 from 72.4 per cent in the third quarter of that year. In fact, capacity utilisation levels have improved consecutively for three quarters. In the first quarter of FY21, it had fallen sharply to 47.3 per cent due to the lockdown imposed after the Covid-19 outbreak.

ICRA’s Nayar said that capacity utilisation was likely to register a seasonal dip in the first quarter of FY23, exacerbated by geopolitical headwinds and uneven demand for goods.

So, what can be done to get India Inc to turn on the investment tap?

[Byte of Madan Sabnavis on solutions]

While investments as a percentage of GDP rose year-on-year in the first quarter of FY23, they were still below the 30 per cent mark required to push the economy on to the path of sustained growth. Gross fixed capital formation, or GFCF, numbers showed that there was an improvement in investments in the first quarter compared to the corresponding period of the previous year. This improvement was probably aided by government capital expenditure. However, it was clear that investments have still not recovered to pre-Covid levels. While disaggregated data is unavailable, experts have said that the government continues to be the source for a large chunk of the GFCF. The hope has been that government capital expenditure would lead to the crowding in of private investments, which would give economic growth the push it needs. However, despite significant central outlays, the private sector has remained investment shy. It remains to be seen what more the government can do to induce a change in behaviour anytime soon.