MUMBAI, Dec 11 (Reuters Breakingviews) – India’s blistering growth has a quality problem. GDP is speeding ahead at 8% in the world’s fifth-largest economy but the government is doing the heavy lifting on investment. Policymakers have spent years trying to coax companies into spending more, with limited success. The result: growth that looks fast but feels flimsy.
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But India Inc’s outlay is not keeping pace with the $4 trillion economy’s expansion.
Private firms’ investments contributed 34.4% to asset creation in the year to the end of March 2024, the lowest share in over a decade. Their share in real GDP fell to 11.5% from a peak of about 13% eight years earlier.
These trends force the government to spend heavily to keep GDP humming — a challenge now compounded by a 50% U.S. tariff on Indian exports. Globally, tariff uncertainty and a flood of cheap Chinese goods have made companies cautious. But India’s muted animal spirits are a stubborn long-term problem.
The result is a paradox: global investors are cheering India’s world-beating growth, which hit an annualised 8.2% in the September quarter, buoyed by tax cuts ahead of the festive season. Yet behind the headlines, policymakers and company executives are sounding the alarm.
In September, S. Mahendra Dev, chair of the prime minister’s economic advisory council, urged the private sector to “invest in India’s growth journey.” Earlier, in March 2023, Modi himself called on big business to step up after unveiling a record 10 trillion rupees, about $111 billion at current exchange rates, in government capital expenditure for the coming financial year. Public spending, including by state-owned enterprises, climbed to an at least 12-year high of 8.4% of GDP in 2023–24.
Real wages are stagnating. After adjusting for inflation, salaried and self-employed Indians earned a lower average monthly income during the year ended March 2024 than they did six years earlier.
That forces Indians to cut back on spending, from everyday items like biscuits to bigger purchases such as motorbikes. Nearly half the workforce still relies on agriculture — one major area where Modi’s reform drive has barely penetrated — leaving millions in informal, low-paying jobs.
A deep-seated shift is also playing out at India’s top business groups. The asset quality crisis that followed a period of industrial splurge up to 2011 saw tycoons stripped of some of the country’s largest assets.
It created an aversion to debt that India Inc is yet to fully shake off. Net debt at the 200 top public non-financial companies as of September 30 stood at a six-year low of 1.9 times EBITDA, per Axis Capital analysts. Many companies have gone further and pursued “zero-net debt” strategies, preferring to fund growth through existing cash flows.
The rise of digital infrastructure and strong stock market returns has made investing in new-age services businesses appear more lucrative and less risky than pursuing capital-intensive industrial projects. Expanding the factory landscape looks especially daunting when India faces stiff competition from cheap Chinese imports in industries from steel to solar cells.
India Inc’s reticence to spend means less bang for every buck in the economy because government spending is less efficient. Incremental capital output ratio — the number of units of capital spent to produce one unit of output — currently stands at 4.4, above the up to 3.8 levels during the three years to 2008, a booming era for private investment, says Hitesh Jain, lead analyst at Yes Securities.
As the disconnect between India’s fast GDP print and investment trends expands, officials are doubling down on their efforts to spur change.
They had already tried to increase India Inc’s industrial competitiveness by offering subsidies linked to production and capital spending in sectors from semiconductors to batteries.
The stakes are high. The more the government invests, the less financial resources it has to expand public healthcare and upgrade its education infrastructure. These worries will come into sharper focus if AI decimates swathes of India’s services workforce and the administration also needs to spend on reskilling.
Securing an attractive trade deal with Washington is a prerequisite to any substantial revival of animal spirits. The rupee is weakening, raising the spectre of higher energy import costs and inflation. New Delhi is facing a perfect storm and India Inc offers little cover.
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Editing by Una Galani; Production by Aditya Srivastav
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