Preconditions exist for a revival of our private investment cycle

Context:  India has seen the longest period of weak investment activity in several decades.

Trend of private-sector investment in India

• Usual trend: Reserve Bank of India (RBI) had shown in a 2018 paper that the typical Indian investment cycle lasts for 12 quarters—with seven quarters of a rising investment rate followed by five quarters of an investment downturn.
• Recent trend: It is now close to a decade since private-sector investment fell off a cliff.
• The fall in the investment rate has led to a decline in potential growth, or the rate at which the Indian economy can expand without lighting an inflationary fire.

Challenges before private-sector investment

• Sensitive nature: The private-sector investment cycle in India is sensitive to many other economic variables, among them capacity utilization, corporate leverage, real interest rates, domestic financial savings, global growth and government policy.
• Uneven economic recovery: The economic recovery has been led by profits rather than wages and by large firms rather than small enterprises.
• Other major concerns: A further disruption from the pandemic or a sharp tightening of global financial conditions cannot be ignored.

Present advantages for private-sector investment

• Better financial position: The deleveraging over the past four years makes it more likely that cash flows will be used to buy machines rather than repay excess debt.
• Easy Financial Conditions: Although it is likely that they will tighten next year as central banks withdraw some monetary stimulus.
  • Monetary policy committee had a surprise focus on real interest rates.
• Dependence on other sources of funding: Albeit the attention focused on weak growth in bank credit, it is less of a worry as nearly half the funding for large companies comes from money markets, bond markets, stock markets and private equity allocations.

Way forward to achieve private-sector investment

• Broadening the focus: Government’s heavy lifting activity will need to continue for another six to eight quarters before private-sector capital spending gains enough momentum.
• Focus on secular recovery: There should be a shift from the present cyclical recovery.
• Attract new investments: Trend of focus on the state of existing capacity utilization by existing companies should shifts towards a digital and decarbonized economy, the new investments because of structural shift.