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The Hindu
15-07-2025
- Business
- The Hindu
Why is corporate investment lagging behind?
India is going through a rocky terrain as far as industrial production and corporate investment are concerned. On June 30, the Ministry of Statistics and Program Implementation (MoSPI) released the monthly growth rate of the Index of Industrial Production (IIP), which has slowed to a nine month low of 1.2%. This piece attempts to explain why industrial activity has not really picked up in any meaningful way since the COVID-19 pandemic. To be fair, it is not as if the government has not tried. They have tried every trick in their book, starting with a significant corporate tax cut to the tune of eight percentage points in September 2019 (from 30% to 22%), then a significant capex-push over the last few budgets, and lastly an interest rate cut recommended by the Monetary Policy Committee (MPC) recently. The 2024-25 Economic Survey expressed its dismay by stating that 'in terms of financial performance, the corporate sector has never had it so good … (but) (h)iring and compensation growth hardly kept up with it … Private sector GFCF in machinery and equipment and intellectual property products has grown cumulatively by only 35% in the four years to FY23, (which will) delay India's quest to raise the manufacturing share of GDP, delay the improvement in India's manufacturing competitiveness, and create only a smaller number of higher-quality formal jobs than otherwise.' Determining investment There is a famous debate between two Marxist scholars, Rosa Luxemburg and Tugan Baranovsky, on what determines investment in a capitalist economy which might be valuable to this discussion. To appreciate this debate and to understand the current predicaments of the Indian economy, we would like to present a basic representation of GDP and its determinants in a 'pure' capitalist economy, that is, one without any State intervention or access to external markets (see Box 1 for such a representation). GDP can be measured in different ways. What we demand generates production in the economy, with the other side being the income generated for the producers. So, from the income side, the GDP is a sum of workers' wages and capitalists' profits and, from the expenditure/demand side, a sum of workers' consumption and capitalists' investment. The purpose of this piece is to explain the latter. To get to the meat of the matter, we make a simplifying assumption that workers consume all their wages and capitalists do not consume at all (the argument does not change even if we remove this strict assumption). As Box 1 shows, wages and workers' consumption cancel each other out. What we are left with are profits which must be equal to investment in such an economy. This equation, however, does not tell us whether profits cause investment or investment causes profits. This innocuous relationship has led to quite a debate in economics, which continues to this day. To resolve this apparent chicken and egg problem, Kalecki, a Marxist economist asked a simple question: of the two, which one can the capitalists decide/control? 'Capitalists may decide to … invest more in a given period than the preceding one, but they cannot decide to earn more.' In other words, investment determines profits in a given period, not the other way round. But if this is the case, what is the limit to investment? Why can they not invest any amount they like? In fact, why should there be a problem of a lack of investment at all? Baranovsky argued that there is no limit to investment provided a certain proportion is maintained between consumption and investment sectors. He went to the extent to say that investment decisions need not be tied to any final consumption demand. An economy where workers' consumption is kept suppressed may still flourish with higher investment and higher profits simply by the decision of the capitalists to accumulate. Since capitalism and accumulation of capital is driven by profitability, investment provides the market for itself. Machines can produce machines to produce more machines. However, Luxemburg countered by saying that while it's true that investment leads to profits, it does not mean that any amount of investment will necessarily be undertaken. That would be a gross misreading of the relationship represented in Box 1. If the corporate sector were to collectively decide to invest, they would all be generating markets for each other, thereby, generating profits. But, unfortunately, investment decisions under capitalism are made by individual firms/capitalists and their decisions would be driven by their own assessment of demand for the products they produce. For example, in situations where the economy is not growing, it would be foolhardy for an individual capitalist to invest because adding capacity, when the existing factories are not running to capacity, would entail more losses. At the same time, if they were to invest collectively, the economy would have actually recovered. But coordinated or collectively planned investment is an anathema to capitalism. Investment, first and foremost, depends on the demand for the goods (whether machinery, toys or cars) it produces. It does not, and cannot, have a life of its own. A pure capitalist economy, without exogenous stimuli, cannot provide an endogenous impetus for its own survival. It requires an exogenous stimulus to kickstart the cycle of more investment and profits. The situation is particularly grave when the economy is in a downturn/slowdown because demand is down. The only way there can be a turnaround is if there is a turnaround in demand itself. The other factor behind investment is finance — internal (retained profits) or external (debt, public offerings etc). Lagging corporate investment The government assumed that with tax cuts and higher post-tax profits in the hands of the corporate sector, investment would pick up. But they have perhaps read the profit-investment causality wrong. Even others, who believe there can be an investment-led revival, miss the crucial point that Luxemburg was making. Investment will follow if there is a revival in process; it cannot lead the revival under conditions of slowdown. Investment cannot be made for the sake of investment. It requires the exogenous stimuli that Luxemburg was talking about. Where can that come from? There are two such exogenous sources — government expenditure and external markets (see Box 2). With a slowing global demand, which is perhaps going to worsen with the 'reciprocal' tariff regime under U.S. President Trump, government expenditure is the most important lever to kickstart the investment cycle. But then has the government not done enough in the form of capex spending? Government indeed has spent but it has so far not succeeded as much as expected. Why? The idea behind capex spending is that it would crowd-in private investment. This crowd-in could happen through a direct impact on investment as a result of better infrastructural facilities or by generating demand for goods produced by the corporate sector. While there is no denying that there is a possibility of crowding-in, there are multiple factors at play here. First, the crowd-in of the first kind, which is through better infrastructure, may be delayed due to the gestation lags these big scale projects usually have. For example, a port takes time to build and become operational. Second, while it is true that all such projects, whether big or small, create an immediate demand, how much of it is domestic demand and how much it is for economies outside depends on the import component of this spending. In other words, a part of this capex may be spent on imports, which simply cancels out without providing adequate domestic demand. Third, even how much domestic demand such a capex would generate depends on the labour intensity of these projects. If most of the money is spent on heavy duty machines, the employment generating capacity will be low, which translates to lower consumption demand. As for the incentive to finance investment through lower interest rates or liquidity, both of which the RBI has been trying, it is like putting the cart before the horse. Capitalists would take loans only if they believe they will profit from such investment to pay the loans back. With sagging demand, low costs of finance is not enough. As Keynes had famously said, 'whereas the weakening of either [speculative confidence or the state of credit] is enough to cause a collapse, recovery requires the revival of both.' This simple lesson needs to be learnt by both the RBI and the Finance Ministry if they want the economy to revive. Rohit Azad and Indranil Chowdhury teach Economics at JNU and PGDAV College, Delhi University, respectively
Mint
08-07-2025
- Climate
- Mint
Climate change is shrinking India's weather forecast window, says IMD chief
New Delhi: Climate change is making it harder to forecast India's weather with the same lead time, said Mrutyunjay Mohapatra, director general of meteorology at the India Meteorological Department (IMD). In an interview, Mohapatra warned that the growing frequency of localized extreme weather events is reducing the predictability of traditional weather patterns. 'If I could earlier predict heavy rainfall three days in advance, now I may only be able to forecast it one and a half days ahead," he said. 'That's the impact climate change is having on our systems." Mohapatra noted that the frequency, intensity, and duration of heat waves have risen in India's heat-core zones across north and central India. At the same time, central and peninsular India are witnessing more heavy rainfall events, while lightning and thunderstorms have become more frequent in eastern and northeastern states. These shifts carry widespread consequences. Extreme weather, ranging from cyclones and droughts to hailstorms and floods, not only endangers lives and civic infrastructure but also disrupts food supply chains, pushing up prices of fruits and vegetables and adding to inflationary pressures. Climate risks also weigh heavily on insurers, who must contend with rising claims due to lightning-related deaths and property damage. India's 2024-25 Economic Survey warned that heat and water stress could significantly affect crop yields, threatening the country's food security. According to Mohapatra, 2024 was the warmest year on record. 'If you look at the warmest years in the past 120 years, most of them have occurred in the last two decades," he said. 'This is not just about extreme weather. It can also affect socio-economic conditions." A recent report by the Centre for Science and Environment, a Delhi-based think tank, underlines the rising frequency of such events. In the first nine months of 2024, India recorded extreme weather on 255 out of 274 days—93% of the time. These events caused 3,238 deaths, damaged over 235,000 homes and buildings, destroyed crops across 3.2 million hectares, and killed nearly 9,500 livestock. The ongoing monsoon season has further highlighted the growing toll. In Himachal Pradesh, torrential rains since 20 June triggered cloudbursts, landslides, and flash floods. At least 80 people have died in rain-related incidents, 38 are missing, and more than 120 have been injured, according to the State Emergency Operations Centre. Roads, bridges, and public infrastructure have suffered widespread damage. Despite the growing unpredictability, Mohapatra pointed out that the IMD's forecast accuracy has improved significantly over the last decade. 'In the past 10 years, our forecasting accuracy has increased by 40% to 50%, even with climate change in the backdrop," he said. 'That's because we've upgraded our observation systems, modelling, communication, forecasting and early warning capabilities." Mohapatra also noted that severe cyclonic storms over the Arabian Sea have been on the rise since the 1990s—a trend aligned with broader climate models. Meanwhile, western disturbances—crucial for India's winter rainfall—are showing a declining trend. These moisture-laden storms from the Mediterranean region are vital for snowfall and winter rains across north India, particularly in Punjab, Haryana, Rajasthan, Uttar Pradesh, and Jammu & Kashmir. This precipitation supports rabi crops such as wheat and barley and sustains water reservoirs through snowmelt. 'The declining frequency of western disturbances due to climate change could impact not just water availability but also crop productivity," Mohapatra said.
Hindustan Times
01-07-2025
- Business
- Hindustan Times
Union cabinet clears ₹1 lakh crore to boost R&D in sunrise sectors
The Union cabinet on Tuesday approved ₹ 1 lakh crore aimed to boost research, development, and innovation in sunrise and strategic sectors, with a focus on scaling private sector efforts and acquiring critical technologies. Union minister Ashwini Vaishnaw briefs the media on the Union cabinet's decisions in New Delhi on Tuesday. (PTI) The Research Development and Innovation (RDI) scheme was unveiled by Union minister Ashwini Vaishnaw during a press conference in New Delhi. Highlighting its industry-driven approach, he noted that the scheme was crafted through extensive consultations with experts and is aimed at supporting projects that have advanced beyond early-stage research to the prototype development phase. 'When a company moves beyond the prototype stage, it often faces the 'valley of death', a critical phase where many innovations fail due to lack of support,' Vaishnaw said. 'This is exactly when timely assistance is needed to turn a promising prototype into a viable product.' The scheme targets sunrise sectors such as clean energy, climate tech, deep tech (quantum, robotics, space), AI in key areas, biotech, digital agriculture, and also interestingly technologies required for strategic reasons, economic security, self-reliance or public interest. 'Countries that invest heavily in R&D see long-term gains in productivity and technological advancement across industries,' Vaishnaw said. The 2024-25 Economic Survey noted that even though India has increased the gross expenditure on research and development (GERD) from approximately ₹ 60,196 crore in 2011 to about ₹ 127,381 crore in 2021, it still is a mere 0.64% of the GDP. The survey noted that this remains 'insufficient and remains low compared to many countries that have forged ahead in R&D'. The way the funding for the scheme works is that the government will channel ₹ 1 lakh crore to the Anusandhan National Research Foundation (ANRF) as a 50-year interest-free loan. ANRF, a government body set up to boost research and innovation, will create a special fund that offers concessional finance to second-level fund managers, who will then evaluate and select individual projects for funding, through both equity and debt. The RDI scheme will be guided by the ANRF governing board, chaired by the prime minister. Its executive council will set guidelines and recommend fund managers and project types. A group of secretaries, led by the cabinet secretary, will approve changes and review progress. The secretary of the relevant sector will be included in the group. For instance, if a project involves AI, the secretary of the IT ministry will be part of the decision-making body. The department of science and technology will be the nodal agency for implementation. Other key decisions taken by the Union cabinet on Tuesday included a nationwide sports strategy 'Khelo Bharat Niti 2025', a key ₹ 1,853-crore road project in Tamil Nadu and ₹ 99,446-crore Employment Linked Incentive (ELI) scheme.
The Print
26-06-2025
- Business
- The Print
India has the fastest growing number of billionaires. This isn't a good thing: Veerappa Moily
McKinsey Global Institute has quoted in its report—'India needs to increase the relatively low participation of its citizens in labour markets and sustain fast productivity growth as the country has just 33 years until it is as 'old' as advanced economies. 'India still has some time to benefit from its demographic dividend for economic growth but is aging faster than many realize.' Despite very fast progress, India is still a low-income country. If India is to achieve the status of being the fourth-largest economy by the end of 2025 and to be a real powerhouse in the world, our policies must be transformative. Citing IMF data, NITI Aayog CEO BVR Subrahmanyam has expressed confidence that India could become the third-largest economy in two and a half to three years. The 2024-25 Economic Survey stated, India will need to improve its global competitiveness through grassroots-level structural reforms and deregulation to reinforce its medium-term growth potential. The survey pitched for less state control and easier rules, stating that lowering the cost of business through deregulation will make a significant contribution to accelerating economic growth and employment amid unprecedented global challenges. It also said that India is projected to reach the same support ratio (number of working-age individuals per senior 65 or older) in the 2050s as seen in advanced economies, but its GDP per capita is just 18 per cent of the World Bank's high-income threshold. Also, in per capita terms, we are still near the bottom of the global scenario tables—136 in nominal GDP and 119 in PPP terms. India still has the lowest GDP per capita among G20 nations. Human Development Indicators are still poor, with challenges in education, healthcare, and poverty reduction. Referring to the reports that India is set to pass Japan as the fourth largest economy, Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at Hong Kong investment bank Natixis, said. 'Inequality is also an issue, certainly compared to Japan.' As of 2023, nearly 45 per cent of India's workforce was still employed in agriculture, while Japan's was at around 3 per cent, with a considerable rise in employment in industrial and service sectors. The share of salaried workers with formal employment contracts was just 23.9 per cent in India, while that of Japan is around 91 per cent. Apart from these criteria, the life expectancy in India is 72, while that of Japan is 84. India's Human Development Index is just 0.685 out of a highest possible of 1. Japan's HDI has crossed the 0.9 mark. India needs to increase the relatively low participation of its citizens in labour markets and sustain fast productivity growth. Additionally, India is ranked 142 out of approximately 190 countries in terms of press freedom, with a nominal per capita GDP of around $2700. India's GDP growth of 6.5 per cent in FY 2025 is the lowest since the Covid-19 pandemic of 2020-21. The risk is that a GDP growth of 6.5 per cent will not be able to generate enough jobs to fully absorb the labour force growth. The most worrying factor is that industries are not adding capacity that will generate more jobs. Creating more jobs in the organised sector is also seen as the biggest challenge to the government. Considering the magnitude of joblessness, there is an urgent need to incentivise state governments to improve the business environment and investments, which in turn will augment the labour force and sustain growth. A growing gap Surprisingly, India is also home to the largest and fastest growing number of billionaires—India has around 200 billionaires today—third globally in billionaire count. The Economic Survey has also warned of the disproportionate rise in corporate profits concentrated largely among a few large corporations. No wonder the gap between the rich and the poor, economic inequality and wealth distribution are widening day by day. The imbalance between profit growth and declining wages will have major macroeconomic consequences. If household earnings do not increase, consumer demand will weaken, undermining the very growth of GDP. This depicts the dark side of India's growth story that we are celebrating! Again, the share of manufacturing in India's GDP in 2023-24 is the same as it was in 2013-14. Where does the PM's favourite 'Make in India' sloganeering stand today? More so, as per the RBI's KLEMS database, the contribution of manufacturing to job creation is lower at 10.6 per cent compared to 11.6 per cent in 2013-14. As per the data from the PRICE ICE 360 survey, the richest 20 per cent of households, which account for Rs 155 trillion in income, save Rs 57 trillion and consume just 63.6 per cent. The bottom 20 per cent earn Rs 22 trillion but spend Rs 23 trillion, resulting in negative savings and the highest debt-to-income ratio of 15.4 per cent. The middle 60 per cent, earning Rs 159 trillion and saving Rs 28 trillion, are the backbone of consumption but remain economically vulnerable, highlighting a macro-micro disconnect. To bridge the gap, we need to shift focus from redistribution to empowerment of the bottom 20 per cent—creating job opportunities and skilling youth, affordable insurance, pension schemes, and tax-friendly saving instruments. The bottom 20 per cent must live without the fear of debt traps or income loss. We also need to look at rationalising GST. The GST council should work out a roadmap for levying petroleum products, electricity and real estate and bring it into the GST regime. Both slabs and rates have to be rationalised. Liberate financial markets to ensure adequate and reasonable business borrowing rates. RBI should also create a roadmap to phase out the Statutory Liquidity Ratio (SLR), which compels commercial banks to buy government bonds. Tariffs on intermediate goods and inputs are too high to push manufacturing in India Roadblocks to growth The harsh reality faced by millions in the country, with rising inequality, stagnating wages, and weak job creation, should prompt serious introspection by the government. The benefits of the so-called economic growth have been concentrated among a minuscule segment of the population, while the wage earners and informal sector workers continue to struggle. India's ascension to the fourth position in global GDP ranking is masked by foundational cracks in the economy. According to the International Monetary Fund's 'World Economic Outlook' released in April 2025, India's GDP is projected at $3.91 trillion for FY 25, while Japan is estimated at $4.03 trillion for FY 25. These figures put India in the fifth spot for now. Niti Aayog CEO saying India has overtaken Japan to become the world's fourth-largest economy is premature. And if India has to overtake Germany to become the third-largest economy in the world, we need to have faster, sustainable, and inclusive growth at all levels. India needs to fast-track the infusion of new technologies and infuse greater investment in research and development both in the government and private sector along with upgradation of human capital with training, skilling and employability. The current trend is dangerous unless growth translates into better livelihood for people and reduces inequalities. M Veerappa Moily is former Chief Minister of Karnataka & former Union Minister. Views are personal. (Edited by Theres Sudeep)
