The story so far: Last month, Finance Minister Nirmala Sitharaman asked captains of industry what was holding them back from investing in manufacturing. She compared the industry to Lord Hanuman of the Ramayana stating that the industry does not realize its own strength and should go forward with confidence. She said, “It’s time for India… We can’t miss the bus”.

Why did she push them like this?

Clearly, the Minister of Finance has not seen the investments take place at the pace that she would have liked. Hoping to revitalize private investment, the government had in September 2019 reduced the tax rate for domestic companies from 30% to 22% if they ceased to avail themselves of any other fiscal SOPs (standard operating procedure).

Niranjan Rajadhyaksha, CEO of Artha Global, says Indian private sector investment has been low for nearly a decade now. “If we look at the drivers of economic growth right now, amber lights are flashing. The export story will be at risk due to the global slowdown, the government’s ability to support domestic demand would also be limited as the fiscal deficit declines. Due to the K-shaped recovery, private consumption is only concentrated in certain parts of the income pyramid.

What is the current scenario?

Let’s look at some indicators over the past few months; usually the number changes are for the previous year’s numbers, but when we’ve been through something as sudden and life-altering as a pandemic for at least two years, it’s useful to see how the numbers for a quarter to another or month to month have changed. It gives us an idea of ​​how well or badly we are recovering. In GDP figures for the quarter ending June, gross fixed capital formation (GFCF) at 2011-12 prices increased by 9.6% to ₹12.77 lakh crore from ₹11.66 lakh crore in the first quarter of FY20, which was the pre-pandemic period. This comes against the backdrop of overall GDP growth of 2.8% to ₹36.85 lakh crore in the first quarter of FY23 from ₹35.85 lakh crore in the first quarter of FY20 Manufacturing GVA (gross value added) also increased by 6.5% to ₹6,05,104 in the first quarter of FY23 from ₹5,68,104 in the first quarter of FY20. If we look at manufacturing growth in the immediately preceding quarter of April-June compared to January-March, we see that the sector suffered a contraction of 10.5%. While private final consumption expenditure, a key pillar of our economy, soared 26% year-on-year for the June quarter, the ₹22.08 lakh crore of private expenditure in April-June 2022 was a significant ₹54,000 crore crore, or 2.4%, lower than that spent in the previous quarter. And GFCF, which is considered an indirect indicator of private investment, fell by 6.8% quarter-on-quarter.

Industrial production has shown growth in each of the first five months of this fiscal year from April, compared to the previous year; but worryingly, the monthly Industrial Production Index (IPI) and S&P Purchasing Managers’ Index (PMI) figures for the manufacturing sector rose in spurts. In an article by The Hindu earlier this month, Pulapre Balakrishnan, who teaches at Ashoka University in Sonipat in Haryana, argued that government capital spending is a precursor to private investment, but there needs to be a trend sustained public spending, for at least half a decade or so, helped generate enthusiasm in the private sector. While the government’s intention to spend aggressively on infrastructure in its budget this fiscal year is encouraging, he says this cycle should have started a few years ago. Now that the government has announced its intention, it says it must now focus on a few priorities; one that it needs to identify the right projects — investments need to be made in infrastructure that improves productivity. Second, he warns that inflation could derail the best-laid public spending programs and urges an increase in agricultural products to help bring food inflation under control.

What happens to the request?

Private companies invest when they can estimate the benefits, and that comes from demand. The Center for the Monitoring of Indian Economy (CMIE) Consumer Sentiment Index is still below pre-pandemic levels, but is much higher than it was 12 to 18 months ago. RBI’s monetary policy report dated September 30 states: “Data for the second quarter [ended Sept] indicate that aggregate demand has remained buoyant, supported by the ongoing recovery in private consumption and investment demand. It shows that seasonally adjusted capacity utilization reached 74.3% in the first quarter, the highest level in the past three years. Manufacturing companies saw a sequential rise in new orders while infrastructure companies showed optimism about the overall business situation, revenue and employment in Q2:2022-23.

In an article on the state of the economy in the RBI Monthly Bulletin published last week, authors led by Deputy Governor Michael Debabrata Patra pointed out that contact-intensive sectors would likely lead the rejuvenation as the restraint due to the pandemic has faded. “Spending on festivals was already driving consumer demand with positive externalities for other components of domestic demand.”

Artha Global’s Dr Rajadhyaksha says we are a bit far from the capacity utilization at which an investment cycle typically starts. Capacity utilization is now much better than it was during the pandemic, when it was down to 67-68%. He says the general rule is that the capital spending cycle really picks up when capacity utilization hits around 78-80%. We are hovering in this region but are not there yet. “If I were to hazard a guess, in the coming months the private investment cycle is likely to accelerate unless there is a genuine outlier event that sets the entire global economy back .”

A UBS Evidence Lab India online consumer outlook survey was conducted in August with 1,500 consumers. Almost three-quarters of respondents noted stable or increasing income levels in this survey (compared to 54% in the August 21 survey). The results suggest high purchase intent for cars and two-wheelers, a diverging trend for real estate, and moderation for some consumer durables (including computers/laptops, refrigerators, air conditioners). (The survey largely covers the “upper income” or “upper middle income” sections of India’s income pyramid on a socio-economic classification and is therefore not representative of the wider population, according to UBS.) Household savings intention remains high with 56% of respondents indicating that they plan to increase their savings at the end of the year.

And this is perhaps the key to the start of the investment cycle, in response to the exhortations of the Minister of Finance.