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What is holding back private capex in India?

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Photo: Mint

Finance minister Nirmala Sitharaman urged captains of  industry to not look for zero-risk investment but expand capacity creation, generate jobs and reduce import bills, at the recent CII Global Economic Policy Summit. Mint looks at the reasons behind the lower private capex:

Finance minister Nirmala Sitharaman urged captains of  industry to not look for zero-risk investment but expand capacity creation, generate jobs and reduce import bills, at the recent CII Global Economic Policy Summit. Mint looks at the reasons behind the lower private capex:

What is the current state of the economy?

Macroeconomic indicators reflect that the Indian economy is back on the recovery track amid a volatile global environment marred by supply chain disruptions. In October 2021, goods and services tax (GST) collections were more than 1.3 trillion, the second highest since GST implementation in July 2017, e-way bills were at a record 7.35 crore, power consumption was 113.37 billion units, purchasing managers’ index (PMI) was 55.4, manufacturing PMI was 55.9, services PMI hit a decadal high of 58.4, and exports and imports were at $35.65 and $55.37 billion, respectively. But it might not have reached the pre-covid levels yet.

Are businessmen averse to risk taking?

No. But investors would like to be assured of demand for what they produce. Demand is still limited to basic needs partly because of the reluctance to shop online. Based on a better performance of high-frequency indicators, it can be said that capacity utilization levels for Q2FY22 would be higher than the 69.4 and 60.0 in Q4FY21 and Q1FY22, respectively. However, the economy may not have reached pre-pandemic levels. The focus of industry is on achieving optimal utilization of existing capacity. Also, if investors are compelled to focus on job creation irrespective of requirement they cannot be competitive in the market.

Investment flow
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Investment flow

What has been the trend of private GFCF?

Gross fixed capital formation (GFCF) at current prices for FY20 was 58.51 trillion, against 55.01 trillion in FY19 with private GFCF being 41.51 trillion and 36.46 trillion in FY19 and FY18. An accommod-ative monetary policy, lower interest rates, global liquidity, and conducive fiscal policy measures could be growth drivers for more private industrial capital expenditure.

Should the import bill be an issue?

The Centre is working towards ‘Atmanirbhar Bharat’. In case of developing nations, there is a strong correlation between imports and industrial development. Imports of the latest technological knowhow would help build Indian industry. Industry could initially work at reducing the import bill in terms of domestic manufacturing of high quality products at affordable prices, thus, limiting imports to the latest global technical innovation and the inflow of foreign investment, leading to employment generation.

What should be the government’s plan?

If the prevailing  economic  scenario continues, the private capex cycle is expected to gather steam in Q1FY22. However, despite adequate supply-side management both by the government and the Reserve Bank of India, if the economy fails to return to normalcy, hiccups on the demand side need to be looked at, which to a great extent can be addressed through fiscal policies. The ultimate solution is the total population being vaccinated.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

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