Why in the News
Private corporate investment, weak since 2011-12 even after major pro-business reforms, is now rising across most sectors. A Bank of Baroda (BoB) study of 2,010 non-financial companies in 31 sectors shows faster growth in fixed assets and fuller use of capacity. Weak consumption threatens to cut the revival short.
Why did private investment stay weak for so long?
- What it is: Private investment is spending by companies on factories, machinery and other fixed assets that add to productive capacity. A firm invests like a baker who buys a second oven only when the first runs full.
- Policy bet: Since coming to power, the government has stepped back and incentivised private firms to invest, under its “Minimum Government, Maximum Governance” mantra.
- Pro-business reforms: The Insolvency and Bankruptcy Code (IBC), 2016 (a time bound process to resolve bad debts), the Goods and Services Tax (GST) a year later and the 2019 corporate tax cut sought to spur investment.
- Unmet hopes: Investment rates did not rise. By 2022 the government openly voiced exasperation with India Inc. (large Indian companies), even after offering Production Linked Incentive (PLI) subsidies that reward extra output.
- The takeaway: Tax cuts and subsidies for producers did not revive investment, because firms do not add capacity without enough buyers.
How did the policy focus shift to consumption?
- Root cause: Before the 2024 general elections, the government turned to weak consumption as the real obstacle to investment.
- Consumer relief: Personal income tax and GST cuts came with substantial direct benefit transfers, cash paid straight into people’s bank accounts.
- PLI to ELI: Support moved from PLI to the Employment Linked Incentive (ELI) scheme, which ties the subsidy to jobs, because consumption needs jobs.
- Patchy recovery: Investment stayed patchy, a K-shaped recovery where some parts of the economy grow fast and others lag.
What does the Bank of Baroda study show?
- Broad improvement: Growth in gross fixed assets, which records actual investment rather than intentions, improved in 22 sectors in the first half of 2026-27.
- Leading sectors: Iron and steel, automobiles, information technology (IT) and logistics posted sharp gains.
- Slower sectors: In about one-fifth of sectors, including power and chemicals, growth fell below last year’s. Three others slowed but stayed in double digits.
Why are companies investing more?
- Asset turnover ratio: The asset turnover ratio is sales divided by fixed assets, showing how fully machinery is used. A rising ratio means demand is filling capacity, prompting fresh investment.
- Better utilisation: For the sample, the ratio rose from 1.14 to 1.30 over the year to September.
- Breadth: 23 industries improved their ratio, pointing to higher investment ahead.
Can investment last if consumption stays weak?
- Rural wages: HSBC Global Investment Research notes steady rural demand so far, but falling real rural wages (pay adjusted for prices).
- Farm stress: Rabi (winter crop) sowing began with low soil moisture and depleted reservoirs. El Nino heat can shorten the grain filling period, when grains form, cutting yields and rural demand.
- Demand signals: Tractor sales have slowed, and demand for non-durables (everyday goods such as soap) remains weak.
- Urban informal wages: Real wages of urban informal workers are barely growing.
Challenges
- Consumption hurdle: Weak consumption can halt investment once spare capacity is used up.
- Uneven revival: Power and chemicals are investing more slowly, so the revival is not economy wide.
- Rural base at risk: Rural incomes, the base of mass consumption, face falling real wages and crop losses.
Way Forward
- Employment linked support: The government should expand the ELI scheme so that job creation lifts household spending.
- Rural income support: The Centre should protect rural incomes through timely crop insurance payouts and rural employment work.
- Track realised investment: The Ministry of Finance should track company balance sheets to see whether the revival broadens.
Conclusion
Private investment is rising on fuller use of capacity, but its durability rests on consumption, which falling real wages are weakening. Whether rural and informal wages recover will decide if private sector led investment finally takes hold.
Key numbers
- Unemployment, 2017-18: A 45 year high (Periodic Labour Force Survey).
- Fixed asset growth, first half, 2025-26 vs 2026-27: Iron and steel 4.3% to 10.5%; automobiles 14.8% to 18.5%.
- Technology and logistics: IT 5.2% to 13.6%; logistics 10.8% to 14.6%.
- Slowing sectors: Power 5.9% to 3.7%; chemicals 10.7% to 8.2%.
- July to September GDP growth (data due November-end): Reserve Bank of India projects 7.2%; BoB 7.4%, State Bank of India 7.8%, HSBC 7.5%.
Matching Previous Year Question
“[2020, GS3, 15 marks] Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and a private entity.”
