The politicisation of Chief Economic Advisor V Anantha Nageswaran’s comments last week on employment not being solely the government’s responsibility meant the crux of the matter was entirely missed. The CEA was not trying to absolve the government of all responsibility. That was just a politically expedient twisting of his words. The crux is that the overt friendship between the Modi government and broader corporate India is beginning to show some cracks.
A few big corporates are happy, but most of the private sector doesn’t seem to be. The fault for this lies on both sides — on the government, for several of its stated and unstated policies, and on our corporate leadership that is too content staying quiet about its concerns.
On the government’s side, and in its defence, there are a number of significant steps it has taken to encourage the private sector to ramp up its investments. The most notable, of course, is the 2019 cut in corporate tax rates to levels comparable around the world. Rates were further reduced for new manufacturing investments. This was naturally widely hailed by corporate leaders and industry bodies across the board. Why wouldn’t it be? It directly increased the profits of corporate India.
However, the flip side of this compact was that they would then use these profits to invest in the country. This is where the agreement breaks down. Sure, the pandemic happened right after the tax cuts. But the companies used this time, and the benefit of lower rates, to downsize, increase profits, and clear their debt. This also cannot be completely grudged—they would obviously look after themselves before looking outwards.
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Appeal to the private sector
The problem is that nothing much has happened on the investment front since then, even though the economy is back to robust growth. The finance minister Nirmala Sitharaman has since then called on the private sector to increase investments several times in interviews and speeches. She couched it as asking them to invest in particular areas like urban infrastructure and to support India’s Sustainable Development Goals, but the overall unsaid appeal was that the private sector needs to increase investments overall.
In late 2022, Sitharaman seemed to lose patience and bluntly asked industry leaders why they were not investing, despite corporate tax rates being cut, production-linked incentives being brought in, and the government defending the private sector at every turn.
“I want to hear from India Inc, what’s stopping you when countries and industries abroad think this is the place to be now,” she asked. You can’t get more direct than that. But the leaders of Indian industry neither provided answers, nor investments. Not anywhere near the level India needs, at any rate.
The CEA’s statement should be seen in this light. It was yet another appeal to the private sector to ramp up their investments.
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Private investments are falling
The thing is, Sitharaman was wrong about one thing. Companies abroad, too, aren’t as enthused by the India story as they once were. Not only is FDI into India falling, something even the Ministry of Finance noted in its latest Monthly Economic Review, India’s share in global FDI is also falling (something they conveniently left out).
The answer to why private investments and FDI are falling isn’t easily arrived at. It requires a process of elimination. An April 2023 report by ThePrint found that private investment in India is not correlated to conventional factors such as consumer demand and availability of bank credit. Even capacity utilisation has a tenuous link. The inescapable conclusion at the time was that the main reason was a lack of confidence.
While that report was based on now-dated data, the conclusion seems to still hold true. Bank credit is still available, consumer demand is picking up in urban India and is really gathering pace among the upper income segments. RBI data shows capacity utilisation is at the 75 per cent mark, which is typically when companies look to increase capacity.
In an interview with ThePrint, former chief economic advisor Arvind Subramanian —who spends large parts of his time shuttling between India and the US — pointed out that many investors in India and from abroad are wary of the government’s “arbitrary” actions, and that “regulatory favours” to a few corporate houses have created the impression that the playing field is not quite level. Smaller investors don’t want to enter sectors where India’s big corporate players are dominant, not for fear of market forces, but for fear of non-market ones.
Perhaps another reason for India Inc’s wariness about entering new sectors is the fact that exiting them when things go bad still takes a terribly long time.
The discontent of smaller corporate India with the BJP government can be seen from the electoral bond data as well. Yes, the BJP received the largest donations, but if you look closely, you’ll see that only 490 entities donated to the BJP, and 92 of these were individuals. About 42 per cent of the BJP’s donations came from just 10 companies.
Remember, until recently, the electoral bonds were considered totally anonymous and, if anybody knew who donated what, it was the government itself through the State Bank of India.
If corporate India is happy with the BJP and presumably thus wants it back in power at the Centre, why didn’t we see them come out in much larger numbers to donate? The bonds could be sold in denominations of just Rs 1,000, so it’s not as if only businesses with crores could donate.
Corporate India — especially the large majority not at the very top — has a message to send the Modi government. So far, it has been communicating silently by either not donating to the BJP, or by refraining from investing in the country.
This silence — likely due to fear of government retaliation — not only hurts these companies by keeping them below potential, but also effectively renders a vital engine of India’s growth severely underpowered.
The author tweets @SharadRaghavan. Views are personal.
(Edited by Theres Sudeep)
Private investments is better for the economy than public investment. We have been spending very large sums on road and rail, borrowed funds that will need to be serviced. Crowding in does not seem to be happening. My sense is that the economy has never been the same after demonetisation. 2. To argue against myself, GST and direct tax collections are doing exceedingly well.