Rekindling corporate investment

Source: This post has been created on the article “Rekindling corporate investment” published in “Business Standard” on 29th November 2023.

UPSC Syllabus Topic: GS Paper 3 Indian Economy and issues relating to mobilization of resources.

News: This article discusses the stagnant corporate investment rate in India in the last decade. It also highlights the factors that determine corporate investment in an economy.

Background:

India’s corporate capex (capital expenditure) cycle has been in a slowdown mode since 2012. Corporate investment (as a percentage of gross domestic product, or GDP) was 11% in 2022, which is 6 percentage points lower than its peak of 17% achieved in 2008.

It has been hovering in the 11-13% of GDP range for the last decade, despite significant improvements in almost all enabling factors – profitability, non-performing assets (NPA) of the banking system, and corporate indebtedness – over the last 5 years.

What is corporate investment?

It is the investment that is made by companies rather than by governments or individuals.

What explains the low corporate investment?

According to the authors, corporate investment is a function of two factors:

1) Investments as a share of sales: An analysis by the authors show that corporate investments a share of their own sales in 2022 has been close to the average for the last 25 years. Thus, companies in India are not significantly holding back on investments.

2) Corporate Sales as a share of the national economy: This is the key reason why corporate investment is still significantly lower than its peak — because corporations are a much smaller share of the national economy today. Corporate sales account for a 76% share of India’s GDP today, compared to a peak of 88% around a decade ago.

What are the factors that drive the share of corporations in the economy?

This is essentially driven by:

1) Productivity: Given their significant edge in productivity and 1991 reforms, their share increased to 82% by 2012.
However, a decline in corporate share over the last 5-10 years has occurred as a result of several large firms going bankrupt (resulting in NPAs).

2) Export Competitiveness: Corporations account for 55-60% of India’s overall exports. One way to gauge the competitiveness of our exports is by looking at our export-multiple, i.e. the growth rate of India’s exports over the growth rate of world exports.
The export-multiple has remained static for the last couple of decades, indicating that our export competitiveness has not increased over time. This also means that corporations haven’t been able to export as much, thus lowering their share.

What should be done?

Low corporate investments must not be viewed as resulting only from unwillingness of corporations to invest. We must consider the structural aspects of corporation’s size in Indian economy as well. To ensure they become a bigger part of the economy, reforms that improve the competitiveness of India’s corporations and make them globally competitive are needed.

Question for practice:

Public investment has been rising in the Indian economy but corporate investment has not been able to keep pace with it. Discuss,