New Hope In Private Investment?

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.