Mentor’s Comment:  India’s Index of Industrial Production (IIP) growth slowed to a nine-month low of 1.2%, raising concerns over sluggish corporate investment despite tax cuts, public capital expenditure, and monetary easing. This has reignited debate on the causes of low investment, drawing from Marxist economic theories by Luxemburg and Baranovsky, and highlighting the need for demand revival and effective government stimulus to reboot the economy.

Today’s editorial analyses the slow corporate investment in India. This topic is important for  GS Paper III (Indian Economy) in the UPSC mains exam.

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Let’s learn!

Why in the News?

Recently, India’s industrial output growth dropped to a nine-month low of 1.2%, raising worries about slow corporate investment.

Why has corporate investment remained low despite tax cuts, capex, and rate cuts?

• Weak Consumer Demand: Despite tax cuts and improved corporate profits, investment remains low due to insufficient consumer demand in the economy. Eg: Even after the 2019 corporate tax cut (from 30% to 22%), private sector investment in machinery and intellectual property grew only 35% over four years (FY20–FY23), as noted in the 2024-25 Economic Survey.
• Excess Industrial Capacity: Many industries are operating at suboptimal capacity, making firms hesitant to invest in new production facilities. Eg: With underutilised factories post-COVID, private players see no incentive to expand despite low interest rates and high liquidity.
• Misreading of Profit-Investment Link: The assumption that higher profits lead to more investment is flawed. As per Michał Kalecki, investment determines profits, not the other way around. Eg: Without a revival in demand, businesses avoid investment regardless of profitability, due to uncertainty about returns.

What limits the effectiveness of government capex in crowding in private investment?

Note: Government capex refers to the expenditure on creating long-term assets such as infrastructure (roads, railways, ports), schools, hospitals, and defence equipment.

• Gestation lags of infrastructure projects: Large public investments in infrastructure (like ports, highways, railways) take years to become operational. Until completed, they do not immediately enhance productivity or reduce logistics costs, thus delaying private sector response.
• High import content in capex: A significant portion of government capex may be spent on imported machinery or inputs, which leaks demandout of the domestic economy. This reduces the multiplier effect and fails to generate sufficient local demand for private sector goods and services.
• Low employment intensity of capex projects: Many infrastructure projects are capital-intensive but not labour-intensive, meaning they create few jobs. This limits income generation and consumer demand, reducing the incentive for private firms to expand production capacity.

Why is demand revival essential for boosting investment?

• Drives Capacity Utilisation: When consumer demand rises, existing production units approach their full capacity. This encourages private firms to invest in expanding their capacity to meet growing market needs.
• Reduces Investment Risk: Strong and predictable demand provides confidence to investors that they will earn returns on capital. Without sufficient demand, firms fear underutilisation of new assets and avoid fresh investments.
• Stimulates a Virtuous Economic Cycle: Higher demand leads to higher sales, which increases profits, employment, and further consumer spending. This self-reinforcing cycle sustains investment momentum and boosts overall economic growth.

Way forward: 

• Focus on Demand Revival: The government must prioritize income support, especially for lower-income households, through targeted welfare schemes and employment guarantees. This will boost consumption, which is essential for stimulating private sector investment.
• Enhance the Multiplier Effect of Capex: Public capital expenditure should be labour-intensive, locally sourced, and designed to reduce import leakages. This will maximize domestic demand generation and strengthen the crowd-in effect on private investment.

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