Why private investment needs to fire

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Summary

  • The IMF and the World Bank have cut their GDP projections for many countries including India. The World Bank says private investment growth in India is likely to be dampened. Mint analyses:

Why did the agencies slash projections?

India’s international macroeconomic environment has darkened due to extended geopolitical tensions, monetary tightening by central banks, and slowing growth in major export markets such as the US. India’s Q1FY23 GDP grew by 13.5%, as against Reserve Bank of India (RBI) projections of 16.2%. While this growth was boosted by a rise in private final consumption expenditure (PFCE) and gross fixed capital formation (GFCF), the World Bank, in its report, stated that “private investment growth is likely to be dampened by heightened uncertainty and higher financing costs".

What is driving India’s private capex?

Credit growth to the industry has accelerated—at 10.5% and 11.4% growth in July and August 2022 respectively. The RBI, in its assessment of the private investment outlook, said the total project cost in 2021-22 increased across the board, with many industries registering a significant rise from 2020-21. Total cost of infrastructure projects—in power, telecom, ports, airports, roads and bridges, SEZ, industrial, biotech and IT parks—increased from 56,103 crore to 81,221 crore during this period. Non-infrastructure industries also recorded a significant rise in the cost of projects envisaged.

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Does investment create a multiplier effect?

Growth in GFCF creates an accelerated multiplier effect, propels the economy on the growth trajectory, and is an important component of the economy’s growth engine. Increased capital investments are a key driver for employment generation, and has a more than proportionate positive impact on aggregate income levels.

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What could hit private capital investments?

The industry primarily looks for durable market demand before increasing capital investments. As the festival season begins, domestic demand is expected to rise. However, increasing geopolitical tensions and global uncertainty have had an adverse impact on export demand. While capacity utilization levels in the country were at 72.3% in Q1FY23—a seasonal decline from 75.3% in Q4FY22—industry is still hesitant to increase private capital investments and is in a wait-and-watch mode.

What policy initiatives are required now?

While lower interest rates theoretically favour increased private capital investment, research shows that durable market demand and positive business sentiments are the key driver for the industry. The govt should come out with appropriate fiscal measures which can boost discretionary spending and thereby, consumption demand. Also, the RBI needs to focus on the revival of the economy, along with curbing of inflation.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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