REUTERS :
India’s blistering growth has a quality problem. GDP is speeding ahead at 8 percent in the world’s fifth-largest economy but the government is doing the heavy lifting on investment. Policymakers have spent years trying to coax companies into spending more, with limited success. The result: growth that looks fast but feels flimsy.
But India Inc’s outlay is not keeping pace with the $4 trillion economy’s expansion.
Private firms’ investments contributed 34.4 percent to asset creation in the year to the end of March 2024, the lowest share in over a decade. Their share in real GDP fell to 11.5 percent from a peak of about 13 percent eight years earlier.
These trends force the government to spend heavily to keep GDP humming — a challenge now compounded by a 50 percent US tariff on Indian exports. Globally, tariff uncertainty and a flood of cheap Chinese goods have made companies cautious. But India’s muted animal spirits are a stubborn long-term problem.
The result is a paradox: global investors are cheering India’s world-beating growth, which hit an annualised 8.2 percent in the September quarter, buoyed by tax cuts ahead of the festive season. Yet behind the headlines, policymakers and company executives are sounding the alarm.
Why aren’t Indian companies investing? The simple answer is weak demand. Capacity utilisation, a measure of how much firms are using existing production capabilities, is below 75 percent, giving companies little confidence to put up fresh investment.
That forces Indians to cut back on spending, from everyday items like biscuits to bigger purchases such as motorbikes. Nearly half the workforce still relies on agriculture — one major area where Modi’s reform drive has barely penetrated — leaving millions in informal, low-paying jobs.
A new insolvency law helped find buyers for distressed assets — ArcelorMittal’s takeover of the Ruia family’s Essar Steel is one example — and strengthened creditors’ bargaining power with defaulting tycoons. Yet the way many owners were pushed into bankruptcy, with the Reserve Bank of India rather than creditors driving the process, left deep scars.
It created an aversion to debt that India Inc is yet to fully shake off. Net debt at the 200 top public non-financial companies as of September 30 stood at a six-year low of 1.9 times EBITDA, per Axis Capital analysts. Many companies have gone further and pursued “zero-net debt” strategies, preferring to fund growth through existing cash flows.
The trend is so pronounced that billionaire banker Uday Kotak has urged young scions of India’s richest families to “create businesses rather than becoming financial investors too early.” Take Rishabh Mariwala. The 42-year-old son of Harsh Mariwala, founder of $10 billion consumer goods giant Marico, left the company in 2011 to launch Sharrp Ventures, which has since backed beauty retailer Nykaa and insurance marketplace Policybazaar. Likewise, Gaurav Burman — part of the fifth generation of the family behind Dabur India, one of India’s top fast-moving consumer goods firms — runs his family’s investment programme, managing a wealth pool of over $1 billion. Both still serve as directors in units of their family businesses.
The rise of digital infrastructure and strong stock market returns has made investing in new-age services businesses appear more lucrative and less risky than pursuing capital-intensive industrial projects.
Expanding the factory landscape looks especially daunting when India faces stiff competition from cheap Chinese imports in industries from steel to solar cells.
Securing an attractive trade deal with Washington is a prerequisite to any substantial revival of animal spirits. The rupee is weakening, raising the spectre of higher energy import costs and inflation. New Delhi is facing a perfect storm and India Inc offers little cover.
