Home / Politics / Policy /  Is India Inc not spending enough? The answer is complicated

Finance minister Nirmala Sitharaman on Tuesday wondered loudly as to why Indian businesses weren’t stepping up spending despite tax cuts and other fiscal incentives. She appeared clearly frustrated at India Inc.’s response to her many exhortations to boost spending that left the government having to do the heavy lifting to sustain the economic recovery.

However, a Mint analysis showed that the private sector already holds the lion’s share in new investments, both overall and in the manufacturing sector, albeit led by a handful of large corporate groups.

Private  firms' heavylifting
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Private  firms' heavylifting

A total of 9.3 trillion worth of capital expenditure projects were announced in the manufacturing space in 2021-22, out of which private firms accounted for 94%, shows data compiled by the Centre for Monitoring Indian Economy. Indian companies commanded a share of 81% and foreign companies 13%, with the rest coming from government projects.

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The private sector’s contribution to project announcements has been steadily increasing over the past decade—it was 53% in FY14. In the years preceding FY14, the share had been largely inconsistent, with some initial years of impressive shows and some duds. The manufacturing segment has been growing, too, and had a 50% share in new investments in 2021-22, up from around one-third a decade ago.

However, the analysis showed an unhealthy mix; the aspect Sitharaman may have been referring to. Over a third of the new investment announcements came from just five projects—37% in FY22 compared to 28% in FY18—most of which were announced by just a handful of private firms, including Vedanta Ltd and Reliance Industries, to name a few.

It must be noted that project announcements do not reflect actual project completions or investments. But the value of projects announced by companies can be a barometer of corporate intent and the overall business environment. Rajani Sinha, chief economist at CareEdge, noted that in FY21 and FY22, the government had a share of 66% and 58%, respectively, in projects completed, but this had fallen to 45% in Q1FY23.

In terms of value, project announcements by the government in the manufacturing segment more than doubled in FY22, while it approximately tripled in the case of private players, albeit on a low base.

But a global slowdown and volatile commodity prices threw a spanner on the recovery in early FY23.

Manufacturing projects worth 2 trillion were announced in the June quarter, down 53% sequentially, pulled down mainly by private firms (down 57%). Government project announcements in manufacturing rose 9%.

Data for the ongoing September quarter will be available in the CMIE database on 1 October.

“Volume of investment depends upon the economic climate, particularly the expectation of profitability," said M. Govinda Rao, chief economic adviser, Brickwork Ratings. “Companies invest only when they expect profits. Although the Indian economy is in a recovery mode and investments are showing an upward trend, the international climate is far from being comfortable, interest rates are on the rise, and supply-side bottlenecks continue."

A CareEdge study of 600 non-finance firms corroborated our findings on the dominance of a few companies and sectors in capex projects. The study showed that while capex grew 22% in FY22, the top two sectors—oil and gas and power—contributed more than 50% to the total investment.

“Currently, the capex among private players is skewed, with a few sectors and a few big players contributing to the chunk of the investment," Sinha said. “The small- and mid-sized players are hesitant in the midst of all the global and domestic economic uncertainties."

The finance minister gave thrust to the production-linked incentive scheme (PLI), which the government expects will help trigger growth. With improving capacity utilization levels, there is a likelihood of increased participation from the other private players, but right now, India Inc.’s animal spirits are concentrated at the top of the league.

Sitharaman made her remarks at the Mindmine Summit 2022.

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Niti Kiran

Niti Kiran is a data journalist who really likes data. With over 10 years of experience in corporate and market research, she has an eye for detail. Data research is Niti's forte and constantly fascinates her.
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