In a recent address, the Finance Minister (FM) called upon the Indian private sector to recognize and harness its untapped potential, comparing it to the sleeping Hanuman unaware of its own capabilities. She questioned why, despite foreign investors expressing confidence in India, the domestic private companies were hesitant to invest. The FM emphasized that the government alone couldn't be the motivating force; it was time for the private sector to believe in its strength and contribute significantly to the nation's economic growth.
However, recent trends reveal a cautionary approach from private investors, with fresh manufacturing investment plans contracting by 17.5% year-on-year in the first quarter of 2023-24. A noteworthy article by the RBI urged the corporate sector to take charge of capital expenditure, emphasizing the need for private enterprises to step up and capitalize on the space created in financial markets by the government's reduced borrowing program.
The core issue lies in understanding what impedes the Indian industry and questioning the sustainability of the government continually injecting funds without corresponding revenue generation from private sector investments.
Despite the government's efforts, including historic cut in corporate tax rates and incentives like the Production Linked Incentive (PLI) scheme, private investment has not seen a substantial uptick. Capital expenditure by the government tripled since FY20, yet private sector investment, measured by gross fixed capital formation, has decreased from 37% of GDP to 31%. Goods exports have remained stagnant around 2011-12 levels, with private gross capital formation accounting for only 22% of GDP in 2022, down from 25-26% in FY14 and FY15, according to the World Bank.
Several factors contribute to this stagnation:
- Policy Interventions: The private sector's confidence is shaken by the unpredictability of government policies, including sudden decisions like demonetization, nationwide lockdowns, and the sudden imposition of regressive taxes on steel exports, the windfall tax on oil refiners and the ad hoc stoppage of rice and wheat exports and many others, but they do not want to speak against a government that has a mammoth majority in parliament. For instance, Narendran CEO of Tata Steel on the issue of taxation of steel exports said "If there is a long-term direction that exports of steel will be discouraged, then we'll have to take a call - then you will only build as much capacity as you need for the domestic market".
- China's Manufacturing Monopoly: The allure of cheaper imports from China has historically deterred private sector investments in domestic manufacturing.
- Low Consumption Levels: Private sector investments heavily rely on demand, which remains low, especially among the rural and middle-class population. It will not be possible for the private sector to display its HANUMANHOOD till the consumers respond.
- Inflationary Pressures: Factors like the Covid-induced economic challenges and geopolitical tensions ; Russia-Ukraine war and Israel -Palestine tension have exacerbated inflationary pressures, further dampening demand.
Conclusion. India's economic growth imperative necessitates a vibrant manufacturing sector. Despite ambitious initiatives like Make in India and Production Linked Incentives, the manufacturing sector's contribution to GDP has remained below 14% for the past three years. To address this, a holistic approach involving policy stability, boosting domestic demand, and tackling global competition is essential. Only through collaborative efforts of the government and private sector can India achieve sustainable growth, job creation, and increased per capita income, as witnessed in the success stories of other high and middle-income economies like China, Japan, Germany, and Singapore.