When the Center cut corporate tax by 10 percentage points in 2019, everyone thought it will unleash India Inc’s animal spirits. Five years later, investment by businesses, large and small, continues at a snail’s pace despite policy measures akin to performance-linked incentives and attractive capital grants.
Ajay Garg, director and CEO of SMC Global Securities, says the decline in private investment can largely be attributed to weak quarterly earnings and slowdown in demand attributable to inflationary pressures. India Inc’s net profit growth was 4 percent within the July-September quarter of 2024, the bottom in 17 quarters, it said.
Pointing to CMIE data, he adds that in the primary half of this 12 months the worth of latest investment projects announced by firms dropped by 29%. 12 months to 12 months.
A recent systemic risk survey by the RBI showed that the private capital spending cycle may not get better in the approaching 12 months, contrary to the central bank’s own assessment of recovery within the second half of this 12 months.
Decline in consumer demand
Despite a healthy balance sheet and price savings, firms are holding off on latest capital expenditures attributable to economic uncertainty. On the opposite hand, consumer demand, bogged down by high taxes and inflation, is slowing across all sectors.
Moreover, the RBI’s move to limit unsecured lending is predicted to decelerate the flow of credit to consumers and further hit overall demand.
Call for growth
The lack of private investment is felt more acutely now that the federal government has also slowed down investment this 12 months. Uday Kotak, founder of Kotak Mahindra Bank, in his New Year message urged India Inc. “She focused on development. Let’s awaken entrepreneurship and animal spirits.
S&P in its recent report ‘India’s Growing Role within the Global Economy’ said it’s surprising that firms usually are not investing to their full potential despite lower corporate tax, sound financial health and PLI schemes.
The report added that the private sector, which generally accounts for about 37 percent of investment within the country, is yet to return forward.
The global rating agency further said that India’s general government net debt has increased to around 86 percent of GDP and the federal government may subsequently determine to strengthen its balance sheet to construct fiscal buffers.
She noted that after the pandemic, the country’s recovery is supported by the federal government’s activities in the sector of infrastructure construction and household spending on investments. Unfortunately, even government spending in the primary half of the present financial 12 months was delayed attributable to monsoons ahead of the overall elections.
Profits are slowing
In September FY25, the economy grew by 5.4 percent in real terms, lower than the RBI’s forecast of 7 percent. It also grew slower than estimated within the June quarter.
According to a report by Motilal Oswal, the primary reason for the slowdown in private spending is the sharp decline in corporate profits, including a modest 5 per cent profit growth projected for the highest 50 Nifty firms in FY 2025. This is the primary instance of single-digit growth within the last five years.
During FY20-24, corporate earnings showed a robust compound annual growth rate of 21%. However, economic growth slowed significantly in the primary half of FY25.
Aditi Nayar, Chief Economist and Director, Research and Outreach, ICRA, says while external demand is weak, reflected in moderate growth in merchandise exports, domestic demand has also been uneven over the past few quarters, limiting investment in some sectors .
“We expect moderate capacity growth in several sectors, such as basic metals, steel, hotels, solar, telecommunications, cement, commercial real estate, refining, mining companies and data centers, in the medium term. This is expected to stimulate investment activity in the near and medium term,” he adds.
However, it explains that maintaining domestic demand within the face of global difficulties may have an impact on the utilization and expansion of production capability. Overall, the private sector capex cycle shall be measured moderately than spontaneous, he adds.
In June, the worth of latest investment projects fell by 92% year-on-year to ₹ 59,900 crore. However, in September, the figure increased by 43 per cent year-on-year to Rs 5.5 lakh crore due to government policies and programs akin to PLI and Make in India. In the 2025 budget, the next capital allocation to infrastructure may increase private capital expenditure.
No support
Even in sectors akin to steel where capital expenditure is high, there’s concern in regards to the failure to curb low-cost imports from China. “The Indian steel industry is a good example of private sector investment. All steel companies including Tata Steel, AMNS, JSPL and JSW have announced significant capital expenditure. We appeal to the government not to let this derail due to cheap imports and all the taxes,” said TV Narendran, managing director, Tata Steel business line in an earlier interview. Animal spirits may have a steel support to ignite.
