GS Paper: GS3-14.Investment models

Why in the News

Private corporate investment in India remains considerably lower than the peak seen in the mid 2000s, even as large corporates hold substantial cash. Firms are deploying funds in financial assets rather than building physical assets such as factories, and are taking money out of the country rather than investing it here. The standard explanations offered for this are subdued domestic demand and global uncertainty. A political economy explanation is now advanced instead, locating the cause in how political power structures affect investment decisions. Centralisation of political power has been unmistakable after 2014, accompanied by fiscal centralisation and a reconfiguration of federal structures. The contested claim is that market concentration around a handful of “national champions” is not an accident of policy but is politically useful, which would make an investment revival costly to the current political settlement.

What are “national champions”?

• Definition: A national champion is a large domestic business group that a government treats as the preferred vehicle for building strategic capacity, and that is favoured in policy design as a result.
• How the status is conferred: Preference operates through the terms of auctions, tariffs, incentive eligibility, clearances and access to public contracts rather than through an announced designation.
• The economic consequence: A handful of such groups now command far greater sway over the economy than before, which raises the entry barrier facing any firm attempting to compete with them.

What does the investment slowdown actually look like?

• Cash-rich firms are not building: Large corporates hold funds but are not committing them to new capacity in India.
• Capital is leaving: Companies are taking money out of the country rather than investing it domestically.
• Investment is below its own peak: Private corporate investment remains considerably lower than the level reached in the mid 2000s.
• Financial assets over physical assets: Corporate India is more keen to deploy funds in financial assets than to use them for factories and plant.
• The standard explanations are incomplete: Subdued domestic demand and global uncertainty have been put forward, and neither accounts for why firms with the means to invest choose not to.

Why does the concentration of political and market power deter private investment?

• Political and fiscal centralisation: Centralisation of political power after 2014 has been accompanied by greater fiscal centralisation and a reconfiguration of federal structures, including attempts to restrict the powers of states and, as a consequence, of regional parties. Eg. The Mines and Minerals (Development and Regulation) Amendment Act, 2026, amending the 1957 law under which the State owns the mineral and signs the lease while the Centre sets the rules and the royalty rate.
• Market concentration has moved in step: The rise of a handful of large companies, aided by policy, has given them far greater sway over the economy than ever before.
• One, patronage for smaller firms has dried up: The concentration of political power and the decline in the relative power of regional parties has ended the patronage and protection that were afforded to smaller and regional firms, who could rise up and become national players.
• Two, policy uncertainty and an uneven playing field: Higher barriers to entry and terms tilted towards larger corporates make it harder for new players to emerge, and firms will not invest if they fear the rules of the game can be arbitrarily changed or that they can be caught on the wrong side of policies. Policy credibility is what is at stake.
• Three, the fear of being muscled out: Investors fear that business success will be met by a hostile takeover by a national champion, so the question is not whether they are allowed to operate but whether they can stay in business and remain competitive over the next 10 to 20 years.

Why would dispersing economic power be politically costly?

• Competition requires a rethink of the strategy: For the larger corporate sector to ramp up investment and for competition to emerge, the strategy of relying on a few national champions needs to be reconsidered.
• Dispersed economic power funds political opposition: A larger number of big private players would disperse rather than concentrate economic power, which would in turn increase the funding avenues available to Opposition parties.
• Economic competition feeds political competition: Weakening the concentration of economic power would possibly weaken the concentration of political power, so greater economic competition could lead to greater political competition.
• The two open questions: It is unsettled whether the current political structure creates the space for new players to safely invest and emerge as competitors to the national champions, or whether market concentration is itself politically useful.

Why do the ingredients of an investment boom not produce one?

• The macroeconomic conditions are present: An undervalued exchange rate, depressed real wages and sustained public sector investment in infrastructure are all in place, alongside the demographic dividend.
• The same mix powered East Asia: This combination powered the rise of countries such as China and South Korea, where firms responded to it with large capacity additions.
• India’s firms are not responding: Firms are likely to remain hesitant and unsure about investing without a change in the approach, despite those conditions.
• Confidence, not capability, is binding: Investment decisions are taken only when investors think they have a fair chance of benefiting from them.
• The end state if nothing changes: The consequent absence of competition raises the possibility of an uncompetitive, high-cost economy.

Challenges to the national champions strategy

• Concentration raises consumer and input costs: Dominant firms in a sector face little pressure to hold prices down, which raises costs for every downstream user. Eg. Telecom tariffs rose sharply after the sector consolidated into three private operators. Fix. Use the deal value threshold introduced by the Competition (Amendment) Act, 2023 to review acquisitions that current turnover tests miss.
• Policy-created advantage is hard to withdraw: Once a group builds capacity on the strength of an incentive, removing the incentive becomes a shock the government is reluctant to deliver. Eg. Most approved incentive under the Production Linked Incentive scheme for large-scale electronics manufacturing has flowed to a small group of mobile phone assemblers. Fix. Publish sunset dates and firm-level disbursement data with each incentive scheme so withdrawal is scheduled rather than negotiated.
• Concentrated bank exposure transmits firm risk to the system: Lending concentrated in a few large groups converts a single group’s distress into a banking problem. Eg. The corporate loan losses that produced the non-performing asset build-up of the 2010s were concentrated in a handful of infrastructure and metals groups. Fix. Enforce large exposure limits at group rather than borrower level and publish group-wise banking exposure.
• Bidding rules can favour incumbents: Net worth, prior experience and bank guarantee conditions in auctions and tenders can exclude new entrants before price is considered. Eg. Critical mineral block auctions have repeatedly failed for want of qualified bidders. Fix. Set qualification thresholds proportionate to block or contract size and allow consortium bidding for first-time entrants.
• Competition enforcement is slow relative to market speed: Investigations concluded years after conduct occurs cannot restore a market that has already tipped. Eg. Appeals against Competition Commission of India orders routinely run for several years before finality. Fix. Fund a dedicated appellate bench for competition matters with statutory disposal timelines.

Conclusion

The reluctance of cash-rich Indian firms to invest is being read as a political economy problem rather than a demand or global uncertainty problem. Concentrated political power, an uneven playing field and the fear of being displaced by a national champion together deny new entrants confidence in a 10 to 20 year horizon. Reversing that requires dispersing economic power, which carries political costs the current settlement has no incentive to accept. What remains unresolved is whether market concentration will be treated as a cost to growth or retained as a political asset.