Over the past few years, the government has tried unsuccessfully to get the private sector to invest, even acceding to its demands and offering incentives.
Yet, the Indian private sector has refused to increase investments in additional brownfield or greenfield capacity; here is why.
How is the current private sector investments?
Private sector investment has not completely evaporated but has been dropping continuously over the past 5-6 years.
The 2020-21 Economic Survey shows that gross fixed capital formation in the private sector never really recovered from its peak of 27.2% of GDP in 2011-12.
Thereafter, it hovered at 21-22% every year from 2015-16 to 2018-19, the last year for which the survey has capital-formation data.
During this period, though, GDP has more than doubled.
What has been the policy response?
The government has gone to some lengths to meet India Inc’s long-standing demands.
Interest rates - For the longest time, industry has been demanding for lower interest rates.
The government thus made its influence to work on RBI and push interest rates to a historic low.
Even former RBI governor Urjit Patel was not spared when he raised interest rates or tightened insolvency laws to punish loan defaulters.
His successor Shaktikanta Das cut RBI’s benchmark repo rate of interest by 2.5 percentage points between February 2019 and May 2020.
While this has failed to make large scale impact, it did help many large corporate debtors lower their interest outgo.
Corporate tax rate - High corporate tax rates were cited as another impediment, though the reality is different.
According to annual budget documents, the average statutory rate was 34.58% in 2018-19, against 34.6% in 2017-18.
The average rate is based on the weighted average of corporate tax rates for a particular income bracket and the number of companies in that cohort.
But, more importantly, the effective tax rate, after availing concessions and exemptions, works out to 27.81%, against 29.49% the previous year.
These rates—both statutory and effective—are expected to drop further.
This is because corporate tax rates were slashed twice thereafter, the last time in the budget for 2021-22.
But falling tax rates have failed to enthuse corporate India.
What are the key reasons for India Inc’s unresponsive attitude?
One, corporate India has actually used the opportunity to compensate itself through higher salaries, dividends and share buybacks.
Chief executive salaries in BSE500 companies grew by 72% during 2013-18, while profits grew by only 56%.
The second reason is the government’s sustained fondness for arbitrary decisions - demonetization, an unplanned lockdown, vaccine policy.
Without stakeholder consensus or administrative feedback, these decisions have ended up hurting rather than helping.
Third, as a direct consequence, these decisions have adversely affected jobs and income.
It has left many companies nursing unutilized capacity.
RBI survey data shows that corporate capacity utilization has crossed 75% in only one quarter since January 2014.
So, unless demand picks up, companies are unlikely to resume investing.
What is the way forward?
Budget 2021-22 made additional outlays for infrastructure, in the hope that this will induce private investment.
But, the COVID second wave has wrecked chances of demand resumption in the short term.
The infrastructure budget should thus be used to aggressively ramp up public health infrastructure.
The Centre must not rely on the private sector to deliver the goods.
As recent experience has shown, the private sector can be a component of the government’s healthcare network. It cannot become the primary caregiver, given its inherent limitations.
