Syllabus:

GS3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Context: 

The Ministry of Statistics and Programme Implementation (MoSPI) recently reported that the Index of Industrial Production (IIP) growth for May dropped to a nine-month low of 1.2%.

More on the News

• Corporate tax cut to the tune of eight percentage points in September 2019 (from 30% to 22%).
• A significant capex-push over the last few budgets, and lastly, an interest rate cut recommended by the Monetary Policy Committee (MPC) recently. 
• The 2024-25 Economic Survey noted a disconnect while corporate profits are at record highs, hiring and wages lag. 
• Private sector investment in machinery, equipment, and IP grew just 35% over four years, slowing progress in manufacturing growth, competitiveness, and quality job creation.

Corporate Investment 

• Investment depends on the demand for the goods (whether machinery, toys or cars) it produces. It does not, and cannot, have a life of its own. 
• A pure capitalist economy, without exogenous stimuli (e.g., government intervention), cannot provide an endogenous impetus for its own survival. It requires an exogenous stimulus to kickstart the cycle of more investment and profits. 
• The situation is particularly grave when the economy is in a downturn/slowdown because demand is down. The only way there can be a turnaround is if there is a turnaround in demand itself.
• In short, investment depends on demand and financing, not just profit potential—a core tension in capitalist economies.

Causes of decline in Investment

• Weak Demand: A persistent lack of demand in the economy discourages businesses from investing in expanding capacity. If existing capacity is underutilized, there's little incentive to build more.
• Impact of Global Slowdown: Global economic uncertainties and slowdowns can reduce export demand, further dampening the domestic investment sentiment.
• Excess Capacity: Many industries are operating below their full capacity, indicating that current production levels are sufficient to meet existing demand. Until this excess capacity is absorbed, fresh investments will remain muted.
• High Interest Rates and Cost of Capital: While not explicitly the primary reason cited for the current scenario, historically, higher borrowing costs can deter investment. However, the article emphasizes demand as a more significant constraint in the present context.

Consequences of Low Corporate Investment 

• Slower Economic Growth: Reduced private capex directly translates to lower GDP growth rates.
• Jobless Growth: Without new investments creating productive assets, the economy struggles to generate sufficient employment opportunities for its growing workforce.
• Stagnant Productivity: Lack of investment in new technology and processes can lead to lower productivity gains.
• Risk of Middle-Income Trap: If India fails to continuously upgrade its productive capabilities, it risks getting stuck in a middle-income trap, unable to transition to a high-income economy.
• Fiscal Burden: In the absence of private investment, the onus falls on the government to boost public capital expenditure, potentially straining fiscal resources.

Way Forward

• Sector-Specific Interventions: Identifying sectors with high growth potential and providing tailored support to unlock investment.
• Strengthening Financial Sector: Ensuring that banks and financial institutions are healthy and willing to lend for long-term projects.
• Focus on Innovation and Technology Adoption: Encouraging R&D and the adoption of cutting-edge technologies to enhance competitiveness and attract investment.

Source: The Hindu

https://www.thehindu.com/business/Economy/why-is-corporate-investment-falling/article69810527.ece