INDUSTRIAL INVESTMENT IN INDIA

  • Last month, Finance Minister Nirmala Sitharaman asked captains of industry what was holding them back from investing in manufacturing.
  • In an article in The Hindu, Pulapre Balakrishnan, argued that capital expenditure by the government is a precursor to private investment but that it would take a sustained trend in public spending, for about half a decade at least, to help kindle enthusiasm in the private sector.
  • Private companies invest when they are able to estimate profits, and that comes from demand. CMIE’s consumer sentiment index is still below pre-pandemic levels but is far higher than what was seen 12-18 months ago.

Background:

Last month, Finance Minister Nirmala Sitharaman asked captains of industry what was holding them back from investing in manufacturing.

She likened industry to Lord Hanuman from the Ramayana by stating that industry did not realise its own strength and that it should forge ahead with confidence.

Need for urge :

  • Clearly, the Finance Minister did not see investments happening at a pace she would have liked. In the hope of revitalising private investment, the government had in September 2019 cut the tax rate for domestic companies from 30% to 22% if they stopped availing of any other tax SOP (standard operating procedure).
  • Niranjan Rajadhyaksha, CEO of Artha Global, says that Indian private sector investment has been weak for almost a decade now.
  • If we look at drivers of economic growth right now, there are amber lights flashing. The export story will be under threat because of the global slowdown, the government’s ability to support domestic demand would also be limited as the fiscal deficit comes down.
  • Because of the K-shaped recovery, private consumption is only concentrated in some parts of the income pyramid.”

Current scenario

  • Let’s look at some indicators over the past few months; generally, changes in numbers are with respect to year-earlier figures, but when we have been through something as sudden and life-changing as a pandemic for at least two years, it is useful to see how figures from quarter to quarter or month to month have changed.
  • This gives us an idea of how well or poorly we are recovering. In the GDP figures for the quarter ended June, gross fixed capital formation (GFCF) at 2011-12 prices rose 9.6% to ₹12.77 lakh crore, from ₹11.66 lakh crore in Q1 of FY20, which was the pre-pandemic period. This is in context of the overall GDP growth of 2.8% to ₹36.85 lakh crore in Q1 FY23 from ₹35.85 lakh crore in Q1 of FY20. Manufacturing GVA (gross value added) also rose 6.5% to ₹6,05,104 in Q1 FY23 from ₹5,68,104 in Q1, FY20.
  • However, when one observes manufacturing growth from the immediately preceding quarter April-June vs January-March, we see that the sector has suffered a 10.5% contraction.
  • While private final consumption expenditure, an essential pillar of our economy, climbed 26% year-on-year for the June quarter, the ₹22.08 lakh crore of private spending in April-June 2022 was a significant ₹54,000 crore, or 2.4%, less than that spent in the preceding quarter.
  • And GFCF, which is viewed as a proxy for private investment, shrank quarter-on-quarter by 6.8%.
  • Industrial production has shown growth in each of the first five months of this fiscal year starting April, compared with a year earlier; but worryingly, monthly numbers as seen on the Index of Industrial Production (IIP) and the S&P Purchasing Managers’ Index (PMI) for Manufacturing have progressed in fits and starts.
  • While the government’s intent to spend aggressively on infrastructure in its Budget for this fiscal is encouraging, he says this cycle should have started a few years ago.
  • With the government having now announced intent, he says it must now focus on a couple of priorities; one that it must identify the right projects — investments must be made in productivity-enhancing infrastructure.
  • Two, he warns that inflation could derail the best designed public spending programmes, and urges a step up in agricultural produce to help rein in food inflation.

SOURCE: THE HINDU, THE ECONOMIC TIMES, PIB

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