The Hindu: Published on 15th July 2025:
Why in News?
Corporate investment in India continues to remain subdued despite strong corporate profits, repeated government efforts, and monetary policy interventions. The recent Index of Industrial Production (IIP) data released on June 30 by the Ministry of Statistics and Programme Implementation (MoSPI) shows a nine-month low growth rate of 1.2%, highlighting weak industrial activity and stagnant private investment.
Background
Since the COVID-19 pandemic, India has struggled to revive broad-based private investment.
Government attempted several measures:
- Corporate tax cut (from 30% to 22%) in 2019.
- Significant capital expenditure (capex) push in successive budgets.
- Monetary easing by RBI through interest rate cuts.
- However, the private sector's Gross Fixed Capital Formation (GFCF) in key sectors like machinery and IP grew only 35% cumulatively over four years.
Key Concepts & Economic Debates:
The issue ties into classical Marxist economic debates on the relationship between profits and investment.
Kalecki’s view: Investment determines profits (not vice versa), but only if capitalists choose to invest.
Luxemburg’s counter: Individual capitalists invest based on demand outlook; without demand, they won't risk capital, even if collective investment could raise profits.
Baranovsky’s theory: Investment can be self-sustaining if proportion between consumption and investment sectors is maintained—but it assumes high coordination.
Key Issues Identified:
Weak Demand Environment:
- Investment is fundamentally demand-driven.
- In a slowdown, firms operate below capacity, hence avoid further expansion.
Misreading of Profit-Investment Causality:
Policymakers assumed high profits (post tax cuts) would automatically lead to more investment—but investment needs assurance of future demand.
Limitations of Capex Push:
Gestation delays in infrastructure projects (e.g., ports, railways) mean slow trickle-down to private investment.
High import content of capex (e.g., machines bought from abroad) dilutes its impact on domestic demand.
Low labour intensity in infrastructure leads to low job creation, hence limited consumption multiplier.
Monetary Policy Constraints:
- RBI’s low interest rates and liquidity measures have not spurred investment.
- Cheap credit alone isn’t enough; confidence in profitability is key.
- Keynes’s insight applies: both credit conditions and confidence must recover for revival.
Impact
- Manufacturing remains stagnant, delaying India's dream to raise its share in GDP.
- Fewer formal jobs being created.
- Long-term productivity and competitiveness in global markets may suffer.
- Government’s fiscal space is strained, yet private sector is not responding as hoped.
Possible Solutions / Way Forward:
Stimulate Aggregate Demand:
- Direct cash transfers, job schemes, rural income boosters to revive consumption.
- Increase employment-intensive public spending, like housing or MSME sector support.
Focus on Domestic Value Chains:
Reduce import leakages in infrastructure spending by boosting domestic manufacturing capacity.
Enhance Coordination:
Public-private partnerships to plan sector-specific investment strategies, particularly in electronics, renewables, and transport.
Build Investor Confidence:
Structural reforms in ease of doing business, land acquisition, and labour laws to reduce risk perception.
Encourage aggregate-level investment coordination via industrial clusters or investment summits.
Conclusion:
The lag in corporate investment is not due to lack of profit or finance, but due to low demand visibility and confidence. Without strong exogenous stimuli like public spending or global market demand, private investment will not lead the revival. Recognizing the macro demand constraints and addressing them through policy is essential for unlocking India's investment potential.
