Corporate investments are still to show a long-awaited recovery

Nowhere did Sachin Tendulkar get more crowd support than at Mumbai’s Wankhede Stadium. Spectators would show their appreciation of the maestro by shouting “Sachin, Sachin” at the top of their voice. The CEOs and promoters of Indian firms have been trying to show similar support for India’s economic potential by loudly chanting “India, India” at every given opportunity. The trouble is that their money is not where their mouth is.

If these CEOs and promoters had really bought into the future of India as they claim to, the firms they represent would be investing more money in the country than they currently are. In a recent research note, economists Nikhil Gupta and Tanisha Ladha of Motilal Oswal estimate that for the period April to June, corporate investments fell 6.2% in comparison with April-June 2022. They stood at 12.3% of GDP, the lowest in the first quarter of any year in the past decade. Further, the share of corporate investments in the overall pie was at 41.2%, much lower than their pre-covid share of around 50%.

Overall investment in our economy is being driven by a surge in investment by the central and state governments. The Centre’s investment grew by 45% in comparison with April-June 2022, whereas that of state governments grew by 65%. At the same time, estimates made by Gupta and Ladha suggest that household investment during the period grew by around 13%.

A research note written by economist Dipanwita Mazumdar of Bank of Baroda, published towards the end of June, points to a slowdown in corporate investment growth over a longer period. Mazumdar analysed the balance sheets of 3,420 companies and looked at the sum of fixed assets and capital work in progress, a representation of corporate investment. Over a five year period from 2017-18 to 2022-23, the growth of this metric averaged 4.9% per year, far lower than India’s nominal economic growth of 9.8% per year. This, as Mazumdar writes, reflects a “slow pace of investment.”

So, data clearly tells us that at an aggregate level, the public confidence shown by those who run Indian corporates is primarily just talk. And talk is cheap. Their actions tell us otherwise. The question, though, is why.

A simple answer lies in India’s private consumption growth slowdown. Growth in nominal private consumption expenditure between 2018-19—before the pandemic broke out—and 2022-23 averaged 10.1% per year. Retail inflation over this period averaged 5.8% per year. For comparison, consider that private consumption growth between 2014-15 and 2018-19 had averaged 11.5% per year when average inflation was a much lower 4.1% per year. This implies that corporate India still has enough capacity to satisfy current levels of consumption and on the whole doesn’t feel the need to expand faster.

As an August news report in Mint, citing research from the rating agency Crisil, points out: “Cement… is the only sector where the present utilization of 70% is higher than its past decadal peak of 69% in 2018-19.” Ultimately, corporates need an incentive to expand at a fast pace—and that’s something that they don’t seem to have currently.

Now, can consumption pick up? Recent data published by the Reserve Bank of India showed that in 2022-23, the net financial assets of households fell to 5.1% of GDP. The figure for 2021-22 has also been revised to 7.2% of GDP from 8.3% of GDP when this data was first released last September.

Net financial assets are obtained by subtracting the financial liabilities of households from their financial assets. The latter comprises savings in various forms like bank and other deposits, life insurance policies, mutual funds, small savings schemes, stocks and currency. Liabilities are a count of loans extended by banks and other institutions.

At 5.1% of GDP, the net financial assets of households are at a 47-year low, estimate Gupta and Ladha. Now, what does this mean in the overall scheme of things? It means that households have been financing consumption by borrowing and spending more, and saving less. The fall in savings also explains a jump in household investments.

This is an anomaly that cannot be sustained, implying that at an aggregate level, consumption growth will eventually slow down and so will household investment growth. So, corporates don’t have enough incentive to invest and expand production capacities. Of course, they will continue to talk up the future of Indian growth because that doesn’t cost anything and helps in building a brand image. No one likes a pessimistic entrepreneur or one who tends to ask basic questions.

Imagine being an Indian cricket fan and going to a stadium to watch a World Cup match featuring the Indian team. Virat Kohli comes out to bat. And there you are, continuing to sit, surrounded by thousands of people who are up on their feet, with their faces painted in Indian colours, waving the Indian flag and happily chanting “Kohli, Kohli” at the top of their voice—even as you keep sitting, unmoved. There is a reason that’s a scenario difficult to think about. When everyone around you is doing something, you might as well join. It’s fun, so why miss out?