While Most Other Things Are Falling In Place, India Needs More Push To Improve Private Capital Expenditure

Investor interest in India at the recently concluded World Economic Forum (WEF) meeting in Davos has been comforting, to say the least. Because investment is the last puzzle that Prime Minister Narendra Modi needs to solve. 

According to media reports, at least two industrially developed states — Maharashtra and Telangana — received a decent number of investment proposals in manufacturing and infrastructure at the WEF. 

“I see a lot of businesses, a lot of companies looking to India as an investment destination as they try to diversify away from other countries, including China,” Gita Gopinath, deputy managing director at the International Monetary Fund (IMF), was quoted as saying.

Huge Opportunity

The enthusiasm was built on valid reasons. For the first time since the end of the Cold War, three economic powerhouses of the world — the United States (US), Europe, and China — have slowed down together.

Consumer confidence is in the negative in the European Union. The University of Michigan consumer sentiment for the US is unstable. The uptick in November and December notwithstanding, it is yet to touch the 2022 peak.

Consumer confidence in China went into free fall in April 2022, without any sign of recovery since. The index decreased from 86.80 points in October 2022 to 85.50 points in November.

The general expectation is that the US will come out of recession first. Europe is in a mess. China is passing through its worst phase, both economically and politically, in the last 40 years.

The famed iron grip of the Chinese Communist Party (CCP) and its policy consistency have gone for a toss. The wave of protests has forced Beijing to take a U-turn from zero-Covid. They are now susceptible to more flip-flops.

Against this backdrop, India is looking rock solid. No challenger to the ruling Bharatiya Janata Party (BJP) is in sight for the 2024 election.

The country is growing at the fastest rate among major economies, and looks set to retain status in 2023 with consumer confidence back to the pre-Covid level.

India suffered a slowdown before Covid. Just when things were starting to look up, the pandemic struck. From 85.6 in March 2020, the confidence score touched 48.5 in June 2021 during the Delta wave.

As of November 2022, the index was back to 83.5. Mahesh Vyas, managing director at the Centre for Monitoring Indian Economy (CMIE), recently reported that sentiments have undergone a marginal post-festive season correction in November and December last year, and is set to improve in January 2023.

Clearly, India is looking hungry for growth. American economist Kenneth Rogoff subscribed to that outlook at the WEF. India, he said, would perform better than its emerging economy peers.

Rogoff is Maurits C Boas Chair of International Economics at Harvard University, a chess grandmaster, and a former chief economist at IMF.

Geopolitical Sweet Spot

Investment decisions in populous economies such as India and China are not taken based on export potential alone. China is not merely the largest producer of solar gear; it is also the largest user.

The domestic sentiments, therefore, do matter and more so in the post-pandemic world, where companies and countries are trying to strike a balance between near-term costs and long-term supply chain security.

The recent redistribution of Apple’s iPhone 14 production to India is a case in point. Apple is not shifting its entire production base from China. It is reducing its dependence on China. India lapped up the opportunity.

The redistribution or relocation trend is likely to continue for the next four to five years, keeping with the turbulence in world politics. And it has many side stories. 

The increasing interest of Taiwanese companies in India is built on security concerns. Taiwan is looking to offshore a part of its manufacturing portfolio in view of rising military threats from Beijing. 

Taipei has been working on this plan for nearly a decade and zeroed in on India as a viable option that can sustain Chinese pressure. They are not alone. Japan and Korea are paying maximum attention to security issues.

In a nutshell, India is in a geopolitical sweet spot.

Delhi’s massive investment in the defence sector, policy retaliation against China after the Galwan valley conflict in 2020, and rising cooperation with Australia, Japan, Korea, and the US — everything is contributing to this advantage.

Add to that the sustained focus on building world-class infrastructure, the dramatic growth of the digital economy, tax reforms, rapid energy transition, among other things, and there is little reason why India cannot live up to global expectations.

Over the last decade, India tapped over 300 million tonnes of annual coal production potential in Jharkhand, Odisha, and Chhattisgarh by adding railway links that were pending for decades. 

This not only helped India to clock world-beating growth in domestic coal production in 2021 and 2022; it also paved the way to attract huge investment in mining.

The high logistics-cost-to-GDP ratio was one of the prime hurdles for Indian manufacturing to become competitive in a globalised environment in the past. 

The dramatic improvement in highway connectivity, removal of inter-state checkposts, introduction of the FASTag for toll collection, and focus on multimodal logistics are improving the core efficiency of the economy.

More Attention Needed

The initiatives taken thus far have already started yielding fruit, as is visible in the huge influx of investor funds in Indian startups, which have started impacting the economic landscape in a big way.

The change is most evident in the e-commerce and electric mobility sectors. According to Statista, two-wheeler EV sales in India increased 10 times between fiscal year 2019-20 (FY20) and FY22.

This is big, but India needs more to change the face of its economy. The low capex spending by India’s private sector is surely a major hurdle in this regard.

Indian corporates suffered heavily during the last boom-and-bust cycle — during the UPA (United Progressive Alliance) era — leading to over-capacity and high levels of borrowing.

Sectors like power, cement, and steel bore the maximum brunt of it. Banks were also major sufferers from the bad debt pile-up.

The ground situation has improved since. The massive clean-up operation in the banking sector is more or less over. This, coupled with windfall profits during the Covid years, has helped corporates deleverage balance sheets substantially.

Demand-side problems are not over yet. Cement and steel are operating at 80 per cent capacity and should start investing soon. However, capacity utilisation in most other sectors is in the range of 65 per cent. The improvement in consumer sentiment may correct this anomaly in FY24. 

According to CMIE, the uncertainty over raw material prices and global topsy-turvy have held back Indian corporates from capacity expansion in FY23. Banks are also not showing adequate interest to support large projects amid global uncertainty.

The government is trying to disrupt the cycle by inviting foreign investors and opening its purse strings through schemes like production-linked incentives (PLIs). 

PLI schemes attracted over $28 billion (Rs 2.34 lakh crore) investment commitments until March 2022. States are also offering big incentives to encourage foreign investors to relocate investments.

A slight push to the banking sector to offer project finance might do wonders. Will the budget be of any help in this direction?