Corporate Investment Lagging Behind

Syllabus: GS3/Economy

Context

• The Ministry of Statistics and Program Implementation (MoSPI) released the monthly growth rate of the Index of Industrial Production (IIP), which has slowed to a nine month low of 1.2%.

Index of Industrial Production (IIP)

• It is one of the prime indicators of economic development for the measurement of trends in the behavior of Industrial Production over a period of time with reference to a chosen base year.
  • It indicates the relative change of physical production in the field of industries during a specified year as compared to previous year.
• Released by: National Statistical Office (NSO).
• Ministry: Ministry of Statistics and Programme Implementation (MoSPI).
• Frequency: Monthly.
• Base Year (as of now): 2011–12.
• IIP is composed of three broad sectors:
  • Manufacturing (77.6% weight);
  • Mining (14.4% weight);
  • Electricity (8.0% weight).
• Another classification is based on the use of goods, which includes: Primary Goods, Capital Goods, Intermediate Goods, Infrastructure/Construction Goods, Consumer Durables and Consumer Non-Durables.

Why has Investment not Picked Up?

• Demand Uncertainty: Weak consumer demand since the COVID-19 pandemic has led to lower capacity utilization.
  • Companies are reluctant to invest in new capacities without clear signals of sustained demand growth.
• Excess Capacity in Industry: Many sectors, especially manufacturing, are still operating below optimal capacity.
  • Firms prefer to use existing infrastructure fully before committing fresh capital.
• Global Economic Uncertainty: Geopolitical tensions (e.g., Russia-Ukraine war, Red Sea crisis, global inflation) have impacted trade and investor confidence.
  • Uncertainty in major economies affects India’s exports and investor sentiments.
• Slow Credit Transmission: Even though repo rates were low post-COVID, credit growth to industry remained muted until recently.
  • Banks preferred retail lending (like housing and auto loans) over riskier industrial lending.
• Infrastructure and Logistics Bottlenecks: While improvements are ongoing (e.g., Gati Shakti, PM Gati Shakti National Master Plan), logistics costs in India remain high.
  • Delays in project clearances and land acquisition slow down capital formation.
• Low FDI in Key Sectors: FDI inflow is high in digital and services sectors but weak in manufacturing and infrastructure.
  • Despite the Production Linked Incentive (PLI) schemes, foreign players remain cautious due to concerns over market scale, ease of doing business, and exit options.
• Delayed Government Capex Multiplier: While public investment (especially in infrastructure) has increased, the crowding-in effect on private investment is yet to fully materialize.
  • State-level capex has also remained weak due to fiscal constraints.

Policy Measures Taken

• Corporate Tax Cut (2019): Reduced from 30% to 22%, aimed at boosting private sector profitability and investments.
• Capex Push: Government increased spending on infrastructure in recent budgets to stimulate demand and crowd-in private investment.
• Monetary Easing: RBI reduced interest rates to lower borrowing costs and improve liquidity.

Conclusion

• India’s industrial and investment slowdown is rooted in demand-side weakness, not merely supply or financial constraints. 
• The private sector awaits demand visibility, and investment cannot precede demand recovery. 
• A coordinated policy approach, grounded in macro demand management, is needed — beyond tax cuts and interest rate tweaks.

Source: TH