New hope in private investment?

Synopsis: After long, India has witnessed an increase in private investment. This article explains the reasons for the current shift and significance of Private investment.

What is the significance of Private investment?

Private investment is the most important source of economic and cultural dynamism in a country.

Most gross domestic product (GDP) and most jobs are created by the private sector.

When private firms build fixed assets, this generates a long-term stream of output and a long-term stream of wage payments.

What is India’s story w.r.t private investment?

India got good growth in the 1991-2011 period, and after that private investment has faltered.

For instance, there has been a decline in the following years of about Rs 50 trillion. On average, this is a decline of Rs 5 trillion or about $70 billion per year.

What is the reason for declining Private investment?

One reason is the sharp decline in private participation in infrastructure and the enhanced role of the state in infrastructure. About half of the decline in private sector investment has happened in infrastructure.

For instance, private “under implementation” infrastructure projects (expressed in 2021 rupees) peaked in 2011/12 at about Rs 36 trillion and now stand at Rs 10 trillion.

A decline of Rs 26 trillion in private projects “under implementation” is on account of the problems of infrastructure.

Why States cannot offset private sector roles wrt to Infrastructural investments?

A decline in private spending is being offset by an increase in government spending. But there are inevitable difficulties in this strategy:

Fiscal capacity and project management in government are quite limited, so the state-led strategy has limited headroom.

For instance, from 2018 onwards, the stock of government “under implementation” projects has declined in real terms by Rs 7 trillion.

As a consequence, the total infrastructure projects “under implementation” declined from Rs 70 trillion in 2018 to Rs 63 trillion today.

What is the reason for current increase in private investments?

Return to normalcy: In the pandemic, some firms faced radical uncertainty, had little management bandwidth left had put investment activities on hold. By 2021, uncertainty had declined and these firms are going back to normalcy in investment.

Export boom due to rising demand from European countries: Developed countries used fiscal policy to restart their economies on a gigantic scale, and an export boom from India started. This was assisted by nationalism in China, which led many in the world to shift business to India. Many Indian firms shifted resources to emphasise export- or export-adjacent activities, and have harnessed the export boom. Through these developments, many firms in the export sector are investing.

Industries gained from Pandemic are investing: Finally, the structure of consumption in the pandemic shifted. Some industries did badly (e.g., Commercial real estate), but some industries did well (e.g. broadband telecom). Firms in the right industries saw high growth and are back to investing.

Source: This post is based on the article “New hope in private investment?” published in Business Standard on 18th September 2021.