Whalesbook
India's Investment Puzzle: Private Spending Lags, Manufacturing Needs a Boost
Rajiv Kumar, former Vice Chairman of NITI Aayog, described the persistent slowdown in private sector capital spending as a significant "enigma." Even with the government's efforts to improve the business environment and infrastructure, private investment has not surged as expected. Private corporate investment has stayed around 12% of India's GDP for over ten years, and its share in Gross Fixed Capital Formation (GFCF) fell to a decade low of 33% in fiscal year 2024. Kumar pointed to a lack of clear policy direction and a need for better on-the-ground ease of doing business as major reasons discouraging private investment. He stressed that state governments are key to this, needing to move from being just "regulatory" to actively "promotional" to encourage investment.
Manufacturing Growth Falls Short on Jobs
Kumar's concerns also cover India's manufacturing sector. For more than twelve years, manufacturing has grown at a modest 3% to 3.5% annually. This rate is not enough to employ the large number of young people entering the workforce each year. This slow progress risks India's demographic dividend, as manufacturing's share of GDP remains around 16-17%, well below the 25% target. While programs like 'Make in India' and Production-Linked Incentive (PLI) schemes have been introduced, they haven't created jobs at the scale needed to meet employment challenges. India's share of global merchandise trade has also stayed stagnant at about 2% for decades.
PLI Schemes Show Mixed Results, Policy Predictability is Key
Production Linked Incentive (PLI) schemes have shown success in specific areas, like large-scale electronics manufacturing, helping India become a mobile phone exporter. By June 2024, these schemes attracted considerable investment and created over 8.5 lakh jobs. However, the manufacturing sector as a whole still struggles to generate enough employment. Kumar's emphasis on policy predictability is crucial, as a stable regulatory environment is essential for attracting long-term industrial investments. While India's Ease of Doing Business ranking improved significantly, the on-ground experience can still be challenging due to varying state regulations.
Charting a Course for Growth
To tackle low private capital spending and the manufacturing jobs gap, Kumar suggests identifying and supporting key export-oriented sectors with anchor investors, similar to the success seen in mobile phone production. The government is focusing on identifying products for domestic manufacturing and boosting exports, using trade agreements for market access. Reforms are also underway to simplify business processes. However, sustained growth depends on increasing capital formation beyond public spending to encourage private investment, which has been held back by weak demand, policy uncertainty, and a lack of business confidence. Shifting to a more promotional approach and ensuring predictable policies are vital for unlocking India's manufacturing potential and meeting its employment needs.