Why India Inc. is not taking a Hanuman leap

Source: The post is based on an article “Why India Inc. is not taking a Hanuman leap” published in The Hindu on 10^th October 2022.

Syllabus: GS 3 – Industries and industrial policies

News: Finance Minister Nirmala Sitharaman has recently raised concern about slow corporate investment despite business-friendly measures taken by the government.

The corporate tax was cut in 2019 for existing companies to 22% from 30% and for new manufacturing companies to 15% from 25%. However, there has been rarely any improvement in the investments.

Private investment accounts for close to 75% of total capital formation in the economy. Therefore, its revival is essential for sustained growth of the economy.

What is the significance of public investment in the expansion of private investment?

The private capital formation last peaked in 2011–12 but it has been on decline at present.

The present government tried to shift away from a state-driven model of economic development and it announced the slogan of ‘minimum government’ to encourage private investments.

However, still the government maintained the level of public investment, but Fiscal Responsibility and Budget Management Act kept it from expanding it any further.

Later, export growth declined due to the global financial crisis and the slowing of the world economy which led private investors to stop investing.

Even the ‘minimum government’ failed to expand aggregate demand when it was needed. Further steps like demonetization and GST also did not boost demand, which raised a sense of insecurity amongst private investors.

However, the government brought change after the pandemic by increasing the allocation of capital spending in Budget 2022 but it will take time to enhance the growth in India.

Therefore, the expansion in public investment should have been taken earlier by the government.

The International Monetary Fund has also suggested that public investment can play the role of an engine of growth for the developing economies.

What can be the course of action?

First, if private investments are declining then the government can come up with public investments. It has also been proven from the history of India that public investments have led the growth in India.

• For example, the growth accelerations of the 1950s, the late 1970s, etc. Therefore, crowding in rather than crowding out characterizes the relationship between public and private capital formation in India.

Second, it is important to choose the right projects and the investment must be focused on productivity-enhancing infrastructure.

Third, the government should focus on overall growth of agricultural produce other than the superior cereals to control the inflation.

• This could also act as an opportunity to end India’s import dependence on edible oils and the persisting shortfall in the supply of vegetables.