CAPEX: ARE INDIA INC'S ANIMAL SPIRITS BACK?

The private sector has been shy of investing for many years. But 2023-24 could be different

- N Madhavan

Last time corporate India unleashed its animal spirits, the economy grew at its fastest pace ever. That was almost two decades ago.

The period between 2002 and 2008 saw huge investments from private companies as they expanded their manufacturing footprint and acquired companies overseas. Gross fixed capital formation (GFCF), a measure of investment in the economy, touched an all-time high of 36% of GDP in 2007-08 (at current prices) and averaged a heady 34% during the period. It’s not surprising that the economic growth accelerated and averaged 8.8% during these years.

The global financial crisis of 2008, and the runaway inflation that India faced in the following years, on account of a loose fiscal policy, killed demand and slowed the economy. Growth fell to a low of 5.5% in 2012-13. This sent India Inc into a hibernation—a really long one.

GFCF has steadily declined and is currently hovering at 29%. What is more concerning is that the share of machinery and equipment in the overall GFCF has fallen from 18.4% in 2011-12 to 13.8% in 2021-22, as per the first revised estimate of national income, consumption expenditure, saving and capital formation for 2021-22, released in February this year.

The Indian government, realizing the importance of private investment in accelerating economic growth, has been making various attempts at ending this hibernation. The government cut corporate tax significantly in 2019 in the hope that it will encourage investment. Second, it focussed on public capital expenditure (capex), thinking this can ‘crowd in’ private investments. The 2023-24 budgeted capex of ₹10 trillion is thrice that of what was spent in 2019-20. The Centre has also pushed the states to invest.