January 14, 2024

Private Investment Slump: Plummeting New Projects

Sanjay Roy

ADVANCED economies had been worst hit by the financial crisis when real GDP fell in 34 out of 37 advanced economies of the world. The growth rate recovery was slow and it took about three to five years for most of these countries to get back to their pre-crisis levels. Some argue that western capitalism has entered into a phase of secular stagnation characterised by low private investment and declining productivity. Capitalism is a system driven by investments mobilised by capitalists in view of future expectation of profits. It is not a system driven by consumption needs of people at large but stimulated by profit making which of course in the last instance depends on the growing consumption expenditure of people and also of plant and machineries and equipment required to produce those goods demanded in the market.

But there also exists a possibility where profits are largely delinked from enhancing productive capacities instead financial profits turn out to be the larger share of corporate profits. In the short and medium run if capitalists face a scenario where profits can be increased without proportionate increase in production then that would be preferred by the producers. More importantly as financial profits account for the larger share of the gains, revenues are more used to share buybacks and dividend payments than building productive capacities. Despite the fact that India emerges to be the fastest growing economies of the world, the slowing down of private corporate investment since the financial crisis continues and the relative decline in productivity growth despite high growth experienced by many developing countries is a notable feature of the current phase of economic growth. It is alarming also because the spontaneous drive towards higher investment in innovation in capitalism in order to defeat competitors heavily suffers due to this new trend.

Since the financial crisis India’s corporate sector’s investment growth didn’t pick up as had been expected. In fact, there had been a secular decline in private corporate investment growth in the past one and half decade. The growth of gross fixed assets in private corporate sector completely collapsed in the post-crisis scenario. In the preceding decade of the crisis, average annual growth of fixed assets was little higher than 15 per cent for Indian corporate sector which has come down to 5.3 per cent in the post crisis period.

But related to this is the fact that income generated from financial services by corporates grew at a much faster annual rate compared to revenues earned from industrial sales. In other words, the high rate of profit which the corporates could manage to retain in the post pandemic and to a large extent during the post-crisis period was primarily driven by the increased growth of financial profits. This also explains the fact that higher profits of corporates are increasingly delinked from higher growth of employment. But this also creates a gloomy market sentiment which drags down stimulus for new investments.

At the end of each quarter the CMIE reports provide figures of new investment proposals announced by private corporates. These figures are generally revised upwards subsequently as new investment reports come in subsequent quarters. Since this is a feature of all quarters reported we may consider that actual differences in new investment between quarters are hardly affected by these revisions.

In the last two quarters that is quarter ending September 23 and quarter ending December 23 the total value of new investment projects announced are 1.9 trillion and 2.1 trillion rupees worth respectively. The total number of projects announced during these two quarters has been 500-600 new investments estimated to involve a 2-3 trillion rupees investment per quarter considering an average level of upscaling due to revisions. This is very low compared to the previous quarters of the current year and also with respect to the averages of previous years. In the preceding two quarters that is quarter ending December 2022 and last quarter of the 22-23 financial year the respective values of new investment announced was in the tune of 9.5 trillion and 14.2 trillion rupees. If we consider the average value of new investments announced in the four quarters of 2022-23 it amounts to 7.9 trillion rupees which is far higher than the current proposals of projects announced. Also in terms of number of projects announced on average were more than thousand in each quarter in the previous year which has almost dropped by half in the recent two quarters.

The estimate of incomplete projects that are abandoned, shelved, stalled or stopped are made on the basis of sustained loss of information as information not being provided by their promoters on a sustained manner. CMIE offers an estimate of new announcements and cancelled projects and the ratio on an average between 2003-04 to 2010-11 was roughly 8.6, meaning that new projects were 8.6 times higher than cancelled projects during the reference period. Between 2011-12 to 2022-23, this ratio has come down to an average of 1.5 indicating a steep decline in realisation of projects and also of fewer number of new projects commissioned. This is evident from the above facts that real corporate investment is not picking up despite the significant increase in capital expenditure by the government in successive budgets.

Although most of these investments are largely confined to infrastructure it could not generate enough stimulus for the growth of private investments in productive sectors. The reality of large unutilised capacities in the industrial sector and also because of lukewarm growth in private final consumption expenditure during the post-pandemic scenario together with rising inequality and unemployment precipitates the problem of demand and dampens the expectation of profits by the corporates. Even if the bank borrowings of the corporates have picked up, it went to meet the requirements of working capital in scenarios of rising costs of inputs and related inflation rather than in enhancing productive capacities.

The alarming fact is the persistently low expenditure on innovation by corporates with respect to their profits further aggravating the problem of declining productivity growth. For developing countries this is even more significant particularly in the context of the ushering in of new technologies which would once again widen the technology gap between the advanced and developing economies.

The productivity gap between the advanced economies and the developing countries has already widened and it is further going to increase the more we depend on unskilled unprotected low cost labour in view of achieving competitiveness. If the growth of productivity suffers it is going to affect unit costs even if the wage levels are kept low. Short-termism of financialised capitalism that is essentially myopic about shareholders’ return seems to be unable to see the requirements of future growth.

Making investments in new technology innovation and adaptation as well on creating effective labour force for the ensuing change in production process if left to the market would not only hold India back from its peers but also would lead to catastrophic levels of unemploymentin the near future. The gloomy signals of new investment projects in any way is expected to continue in an election year and therefore the slowing down of private investment growth is not going to turnaround in the immediate future.