the reality check regarding investments in india by indian corporates

July 03, 2023

When it comes to India’s economic policy, possibly the most important priority of the current government has been to incentivise investments by Indian corporates, especially those belonging to the private sector.

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.

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.

#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

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

#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

#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. . 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 . Most of the growth in investments has happened in the infrastructure-related sectors of the economy. I

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.

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

strategies in planning for economic growth since independence

Planning in pre - 1991 or pre-reforms phase
- 1950-1990 -towards public secotr - regularized private sector
- Reliance on public sector
- Controlled private sector
- Heavy industries - iron and steel
- Small scale industry promotion
- Restrcitions to foreign ca[ital and eforcement of foreign exchange regulation act for its regulation

Harrod domar model - 1st FYP
- ROLE OF CAPITAL ACCUMULATION'S DUAL CHARACTER
  - Incrreases national income - demand side
  - Increases production capacity - supply side
  - Depends on net investment increase rate
Nehru - mahalanobis model 2nd FYP
- 2 sector model
  - Consumer goods sector
  - Capital goods sector
- Focus on investment in heavy industries
- Self reliance
- Till 5th FYP
Gandhian strategy
- Acharya shriman agarwal
  - Raise material and cultural level of masses
  - Basic minimum standard of life
- Scientific development of agri
- Growth of cottage industries
- Emplyment oriented planning

Planning post 1991
- Fiscal deficit increased till 1991
- So new economic policy
  - Private sector - promoted
  - Foreign inflows - encouraged under foreign direct investments - FDI and FII - foreign institutional investors
  - Emphasis on PPP
  - LPG - 8th FYP

five year plans in india