New Hope In Private Investment?

Business Standard     20th September 2021     Save    
QEP Pocket Notes

Context: Private investment in India have been on fall since 2011. There is a small recovery in recent months.

Importance of private investment

  • Contribution to GDP: As most GDP and most jobs are made by the private sector. It is important source of economic and cultural dynamism in a country.
  • Long-term benefits: When private firms build fixed assets, this generates a long-term stream of output and a long-term stream of wage payments.
    • An investment project plays out for a short period of time and then kicks off output and wages for a sustained period.
         

Major factor for fall in private investment: Problems in infrastructure sector

  • Half of the decline in private sector investment has happened in infrastructure: Private “under implementation” infrastructure projects (expressed in 2021 rupees) peaked in 2011/12 at Rs.36 trillion and now stand at Rs.10 trillion.
  • Compensation: Overall, this sharp decline was compensated by expansion in government spending.
  • This is not sustainable as fiscal capacity of government is limited, resulting in recent fall in overall infra-investment levels.

Factors contributed towards recent revival in private investment

  • Swift pandemic recovery: By 2021, uncertainty had declined and fire-fighting had declined. Thus, firms are going back to normalcy in investment.
  • Export boom: As vaccination in developed countries took off and developed countries used fiscal policy to restart their economies on a gigantic scale, boosting demand.
    • Versatility of Indian firms: Many Indian firms shifted resources to emphasise export- or export-adjacent activities, and have harnessed the export boom.
  • Supportive global sentiment: As nationalism in China led many companies to shift business to India.
  • Shift in structure of consumption amidst pandemic: Some industries did badly (e.g. commercial real estate), but some industries did well (e.g. broadband telecom).
    • Firms in the right industries saw high growth and are back to investing.

Conclusion: The recent spurt in private investment in absolute terms is not significant. Though it will be important if they are a turning point, as opposed to the long history of declines.

QEP Pocket Notes