An inexplicable aspect of India’s economy, extensively commented on by experts, is the way capacity utilisation in industry has remained more or less stagnant at 60-70% over the past decade. New investments fructify only when capacity utilisation reaches close to 90%. That is when entrepreneurs plan new capacities.
In a few months, Prime Minister Narendra Modi will complete nine years in office and the one thing that has exasperated policy makers in his government is the lack of broad-based recovery in private investment.
Both greenfield (new projects) or brownfield (expansion of existing capacity) investments have been admittedly weak. Manufacturing forms 14% of India’s GDP. Since ‘Make in India’ launched in 2014, the deadline for one of its key goals — to lift the share of manufacturing in GDP to 25% — has been pushed back three times, from 2020 to 2022 to 2025. The ratio has remained unchanged since 2014.
The frustration of policymakers has manifested in various ways.
Recently, in an interview with a prominent business channel, the revenue secretary said the government would like to see some real commitment of investments by the private sector before extending the time period of key tax concessions in the forthcoming Budget. He said there was no point extending tax concessions when the private sector was not adequately responding with new investments.
The revenue secretary was essentially admitting that the Modi government’s biggest tax concession to industry (15% corporate tax for new projects), announced in September 2019, had failed to trigger new investments on a significant scale. The government had touted its 15% corporate tax for new projects as the world’s lowest, which would make India the most attractive investment destination. But that never happened. It is not clear whether the forthcoming budget will extend the concessional corporate tax regime for another few years.
Union finance minister Nirmala Sitharaman also showed exasperation recently when she advised Indian businessmen to realise their inherent strength. She said like the mythical Hanuman, Indian businesses are not fully exploring their hidden prowess. More recently, the FM said the states need to be much more proactive in attracting new investments. These statements betray frustration that private investments are not picking up on a scale required to drive real growth and employment.
Clearly, the supply-side measures comprising special tax benefits/subsidy to industry aren’t working as the government had desired. Government-driven public infrastructure projects have created higher capital formation in recent times, but that has not led to the private sector participation as part of a “crowding-in effect” as envisaged by the finance minister.
According to Dhananjay Sinha, head of Systematix Institutional Equities, a private research firm, the growth in government-driven fixed capital formation in the second half of 2022 camouflages a real decline of over 6% in the fixed private capital formation. Sinha also asserts that private investment as a ratio of GDP has actually declined.
All this may not be good news for the Modi government, which likes to keep up the rhetoric of India being the best investment destination. The reality says something else. It is palpable in the interaction between the government and industry. The reality is also evident in the way globally visible brands like General Motors, Ford Motors and Harley-Davidson have exited India.
Lack of private investment growth must remain the Achilles heel of Modinomics.
Rarely has one seen broad stagnation in the capacity utilisation of industry caused by lack of demand for nearly a decade. And as the Modi government nears the completion of a decade in office, it also stares at a possible global recession which would further delay a potential recovery of manufacturing in the economy. The looming question, therefore, is: will it be a lost decade for Indian manufacturing?
This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been republished here. To subscribe to The India Cable, click here.