With exports slowing and the Centre committed to meeting tighter deficit targets, continuation of the economic recovery now hinges on private consumption and private capex taking off. This is perhaps what prompted the Finance Minister, Nirmala Sitharaman, to recently ask India Inc why it hesitated to make new investments despite a lower corporate tax rate and Production Linked Incentives (PLIs). A recent RBI study showed that, though private sector investment intentions (791 projects with a cost of ₹1.93 lakh crore) in FY22 revived from Covid lows, they remained well below peak levels of FY13 (₹3.05 lakh crore) or even FY20 (₹2.32 lakh crore). But the reasons for the private sector holding back on large projects may have more to do with legacy issues and industry-specific challenges, rather than a lack of confidence in India’s growth story.  

It is by now acknowledged that the previous big capex boom in India, which saw the investment-GDP ratio soar from 27 to 38 per cent between FY04 and FY08, had many undesirable aspects. Companies and banks which fuelled that boom cannot afford to repeat those mistakes. The start of a fresh capex boom now depends on the emergence of a new set of private promoters, and lending institutions who are willing to give project lending a second chance. The Centre’s PLI scheme, aimed at attracting greenfield investments into new sectors such as electronics, semi-conductors and renewables, can certainly help with this reboot. But private investors may like to gauge the ROIs on the first set of PLI-funded projects before diving in. Two, most capex cycles in the past were driven by giants in the petrochemical, metal, mining, steel and cement sectors making big bets during commodity super-cycles. But having burnt their fingers in the commodity collapse since 2011, these giants have turned wary of greenfield capex and are focused on consolidation and acquisitions instead. This trend, which is healthy, may not reverse without fuller utilisation of existing capacity and a global growth revival. Three, in some sectors, disruptions have made investing decisions difficult. The auto sector, for instance, has seen its goalposts shift from meeting higher emission norms, to manufacturing hybrid vehicles, to fully electric vehicles in just 3-4 years, with the enabling ecosystem yet to be ready. Here, the Centre can help by offering industry a clear roadmap on how regulations and taxation in each sector will pan out in the long run.

Finally, the Centre also needs to recognise that the industries that are gaining the lion’s share of the consumer wallet and thus attracting foreign capital in the post-Covid world hail from the technology, telecommunications, BFSI, retail and consumer-facing services sectors, and not traditional manufacturing. ‘Capex’ for these sectors means investing in technology and talent, rather than in land or machinery. Given that these sectors are big job creators as well, policymaking needs to focus on tracking these investments and creating a friendly policy environment for them to thrive.

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