Private Investment

Context: Recently Finance Minister rightly flagged concerns about sluggish corporate investment, despite the government’s business-friendly stance, including a reduction in the corporate tax.

• The reduction, effected in 2019, lowered the rate for existing companies to 22% from 30% and for new manufacturing companies to 15% from 25%. However, the corporate investment rate, i.e., investment as a share of the national income, has barely budged.

Capital Formation:

• Capital formation is a term used to describe a country’s net capital accumulation over an accounting period. The term refers to capital goods additions such as equipment, tools, transportation assets, and electricity.
• Countries require capital goods to replace older ones used in the production of goods and services.
• Production falls if a country is unable to replace capital goods as they reach the end of their useful lives.
• In general, the higher an economy’s capital formation, the faster it can grow its aggregate income.

Decline of private capital formation:

• The NDA government’s first pronouncements in 2014 had conveyed that it desired a shift away from a state-driven model of economic development. If this was to be, the private sector would take the lead in driving the economy. The government aimed to improve the ease of doing business in India.
• As private capital formation last peaked in 2011–12, its decline is something that the present government inherited.
  • However, it has had no success in turning it around. Though it has not allowed public investment to slip, that has not been enough under the circumstances.
  • Either ideological predilection regarding the size of the government or the straitjacket imposed by the Fiscal Responsibility and Budget Management Act (FRBMA) have held back the government from expanding it.
• Since 2014 the upsurge in public investment had long since ended and agricultural growth had become erratic.
  • Finally, with the global financial crisis and the slowing of the world economy, export growth declined. These added up to a slowing of the exogenous drivers of demand, and private investors could not but have seen that the situation was not likely to turn positive soon.
• Based on the situation in 2014, India’s investors would have been fully rational in anticipating a not-so-rosy future for the economy unless some exogenous factors were to turn favorable, or the government were to act decisively to energize the situation through public investment.
• They would have seen that demonetization, with the attendant digitization, and the roll out of the GST could not have done much for the growth of demand.

Impact of COVID-19:

• While the government has for long nursed an aversion to the government playing a role in capital formation, the experience during the pandemic seems to have brought about a change of mind.
• The Union Budget of 2022 was defined by a historic increase in the allocation for capital spending. This could have a positive effect on private investment, but past experience suggests that it could take time to play out.
• So, the expansion in public investment may have to be sustained for sufficiently long.
• Even the fiscally conservative International Monetary Fund has suggested that public investment can play the role of an engine of growth for the developing economies.
• The sustained growth needed to kindle private investment may require that the current public investment thrust be sustained for at least half a decade.

Stepping up public investment:

• The one lever that the government could have pulled as it watched private investment decline was to step up public investment.
• Since 1947, every turning point of growth in India was preceded by a significant shift upward of the public investment rate.
• It suggests that crowding in, rather than crowding out, characterizes the relationship between public and private capital formation in India.

(Crowding-in is a phenomenon that occurs when higher government spending leads to an increase in economic growth and therefore encourages firms to invest due to the presence of more profitable investment opportunities.)

Way forward: Two aspects would remain crucial even if the government were to find the will to maintain its current pace.

• It is important to choose the right projects focusing on productivity-enhancing infrastructure. Here, some tied transfer of funds to the States would be desirable, as they are better placed to identify such investment.
• Inflation can derail a high public investment programme due to the disaffection it generates. Its control would require a step-up in the growth of agricultural produce other than the superior cereals.
  • In fact, this should be seen as an opportunity to end India’s import dependence on edible oils and the persisting shortfall in the supply of vegetables. Only a supply-side thrust can permanently end food inflation.

Though this government may have inherited the sluggish private investment, it must reflect upon whether its own actions may have adversely affected the investment climate.

Source:   The Hindu

Previous Year Questions

Q.1) In India, which of the following can be considered as public investment in agriculture?

1. Fixing Minimum Support Price for agricultural produce of all crops
2. Computerization of Primary Agricultural Credit Societies
3. Social Capital development
4. Free electricity supply to farmers
5. Waiver of agricultural loans by the banking system
6. Setting up of cold storage facilities by the governments.

In India, which of the following can be considered as public investment in agriculture? (2020)

Select the correct answer using the code given below:

1. 1, 2 and 5 only
2. 1, 3, 4 and 5 only
3. 2, 3 and 6 only
4. 1, 2, 3, 4, 5 and 6