Financialisation and Sluggish Private Corporate Investment
Sanjay Roy
SINCE the global financial crisis, India experienced a declining trend of investment to GDP ratio particularly due to declining investment growth in the private corporate sector. In the recent past, there has been little uptick in this ratio driven by capital expenditure undertaken by government spending. Although such high capital expenditure for successive years didn’t even ‘crowd in’ private investment. Recently the ministry of Statistics and Programme Implementation has conducted a survey of private sector’s current CAPEX and future investment intentions. The primary objective of the CAPEX survey is to estimate the CAPEX trends of private corporate sector enterprises from the past three financial years (2021-22, 2022-23 & 2023-24) along with anticipated capital expenditure for the current year (2024-25) and upcoming financial years (2025-26).
The inaugural edition of the survey covers 2,172 enterprises those who shared actual figures for the past three financial years and intended figures for the upcoming financial years. The survey also identifies the purpose of capital expenditure and the sectors in which investment shares have been higher. Even though the survey highlights the fact that gross fixed assets of enterprises have increased while capital expenditure per enterprise seem to have declined. This might be indicating aging industries or declining efficiencies as assets increase but output generated out of the incremental addition of assets tend to decline. The other reason could be increasing investment in non-tangible assets. The critical trend of declining private corporate investment continued for more than a decade since the financial crisis and India’s rates of saving and investment both show a long-term declining trend.
PRIVATE INVESTMENT TRENDS
Most of the late industrialising countries achieved a near 40 per cent investment and savings ratio to GDP and India could achieve such ratios during the first decade of the millennium when she also recorded high growth. Savings as a percentage of GDP increased from about 11 per cent in 1975 to 34 percent in 2009-10 and investment rates also increased from about 25 per cent in 2000 to more than 34 per cent in 2008-09. The investment ratio declined consistently thereafter with some recent upward trend but still recording less than 30 per cent.
The current survey shows that average gross fixed assets (GFA) per enterprise has increased from Rs 3151.9 crore in 2021-22 to Rs 3279.4 crore in 2022-23 and further to Rs 4183.3 crore in 2023-24. But the estimated CAPEX per enterprise was Rs 109.2 crore increased to Rs 148.8 crore in 2022-23 but declined sharply to Rs 107.6 crore in 2023-24. The figures which show the intended investment by these enterprises also increases in 2024-25 and then declines in the subsequent year. The highest GFA per enterprise is recorded by ‘Electricity Gas Steam and Air Condition Supply’ followed by manufacturing and manufacturing sector accounts 65 per cent of the GFA in private corporate sector. In 2024-25, 44 per cent of intended investment by the private corporate sector will be attracted by the manufacturing sector. It is also estimated that out of the estimated per enterprise CAPEX for 2024-25 40.3 per cent will be used for core assets and 28.4 per cent on enhancing the value of existing assets and the rest on opportunistic assets and debt strategies.
It is important to note considering longer period the share of industry in total investment has fallen from 35.8 per cent in 2011-12 to 30.4 per cent in 2022-23 and that of manufacturing also declined from 17.8 per cent to 15.7 per cent during the same period. Another source of investment used to be FDI particularly if it is greenfield investment. The share of net FDI to GDP ratio has also fallen in the recent decade which has come down from 1.8 per cent in 2008-09 to 0.8 per cent in 2022-23. The declining trend in investment rate has its bearing upon the overall growth rate. The deceleration of GDP growth compared to the high growth rates of 2000s can be attributed to this low growth of investment.
In capitalism, the circuit of capital begins with investment and ends with realisation of profits which allows augmenting of the initial investment. The entire organisation of production and mobilisation of resources is driven by an expectation of profits at the end. Investors mobilise investment through credits received from banks or financial institutions. The money released in the form of credits brings back a return to the banks and deposits as received wages, salaries or profits. Hence the amount of credit released by banks also depend on the demand generated in the economy. It is really worrying that bank credit to industry as a share of total credit has consistently declined from 44.8 per cent in 2014 to 22.4 per cent in 2024. This indicates slowing down of demand in the economy while banks are keen to invest in other sectors which are more lucrative in terms of generating returns.
FINANCIALISATION AND PRODUCTIVE INVESTMENTS
The slowing down of private investment in building productive capabilities and the declining share of household savings as a percentage of GDP are two critical features that reflect the impact of financialisation of the economy. Financialised capitalism prioritise maximising shareholders’ returns instead of long-term growth. Enterprises are disciplined by the fluctuations of stock market and the threat of hostile takeover. As a result, investments are highly sensitive to short term gains and averse to risks related to long term returns. On the other hand, profit making is easier and hassle-free in the financial markets. The share of profits through financial transactions have been higher than profits accumulated by non-financial companies. Therefore, investments are attracted to financial markets and production capabilities lack adequate investments. Most importantly development of new technologies requires huge investments which suffer due to short-termism.
India and China in 1996 used to spend 0.6 of GDP on R&D. In 2020 China escalated this share four times making it 2.24 per cent of GDP while India continues with the same proportion. Many studies suggest that private investments are less responsive to technology changes as those involve risks and change in production structures. In most countries including China, Brazil, USA major innovations are incubated by public institutions or enterprises and even by publicly owned venture capital. The declining share of public sector in GDP and in gross fixed capital formation in case of India exacerbates the problem as private corporates are averse to investments that involves longer turnover time or larger start-up costs.
The decoupling of investment, production and profit has also delinked profit from employment. The speculative gains derived from asset inflation are not accompanied by new jobs and hence inequality rises. India experiences alike other countries a steep decline in the share of wages in value added and decline in real wages. This caused depletion of net savings due to increased borrowings. Investors are not inclined to increase their capacities as they hardly expect higher profits in the current levels of consumption, particularly because in many sectors enterprises are left with large unutilised capacities. The rise in gross fixed asset per enterprise as indicated in the survey is a result of accumulation of assets from the past while capital expenditure per enterprise remains sluggish because enterprises are not stimulated to invest given the gloomy domestic and external markets.
With rising uncertainty due to global tariff wars and the disruption that followed, global trade and investment flows are going to suffer in the immediate future. Domestic investment needs to be jacked up but that requires a major intervention in the demand side of the economy and that is inimical to the interests of global finance.
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