Investment & Role of Private Sector

Reserve Bank of India (RBI) Governor Shaktikanta Das addressed the need for private sector investment to boost India’s economic growth. Mr. Das highlighted the importance of private sector involvement in sustaining economic momentum, especially as consumption demand shows signs of revival.

Key Points:

• Governor Das emphasized that the private sector needs to increase its investments significantly. This is crucial for supporting sustainable economic growth and ensuring that the economy remains resilient to external uncertainties.
• The current conditions are favorable for investment, making it an opportune time for the private sector to invest more heavily.
• Economic Growth Drivers:
  • Consumption: Higher domestic consumption can help protect the economy from external shocks.
  • Investment and Exports: Both investment and exports are critical for maintaining economic momentum. These elements need to work in tandem to drive sustained growth.
• Manufacturing sector’s contribution would be “pivotal” in generating additional employment. Towards this, initiatives such as Make in India, Startup India, One District One Product, and the Production-Linked Incentive schemes are helping the sector gain competitiveness and grow faster.
• Services sector had remained the mainstay of growth in the Indian economy for the last several decades, but must now “explore new vistas of opportunities” with a focus on higher value-added services.
• MSME sector, in particular, holds a lot of promise to step up growth and employment opportunities.

Current Economic Status:

• Recent data shows that while growth has moderated slightly, fundamental drivers such as consumption and investment are gaining momentum.
• The RBI projects a GDP growth rate of 7.2% for 2024-25.

Private Sector Investment in India

• In India, private investment began to pick up significantly mostly after the economic reforms of the late-1980s and the early-1990s that improved private sector confidence.
• From independence to economic liberalisation, private investment largely remained either slightly below or above 10% of the GDP.
• Public investment as a percentage of GDP, on the other hand, steadily rose over the decades from less than 3% of GDP in 1950-51 to overtake private investment as a percentage of GDP in the early 1980s.
• It, however, began to drop post-liberalisation with private investment taking on the leading role in fixed capital formation.
• The growth in private investment lasted until the global financial crisis of 2007-08. It rose from around 10% of GDP in the 1980s to around 27% in 2007-08. From 2011-12 onwards, however, private investment began to drop and hit a low of 19.6% of the GDP in 2020-21.

Factors Contributing to the Decline

• Low Private Consumption: Strong consumption is necessary to encourage businesses to invest, as it signals future demand for their products.
• Policy Factors: Structural problems and policy uncertainty have also been cited as reasons for the decline in private investment. For example, the slowdown in economic reforms and changes in government policies can deter long-term investments.
• Reforms Correlation: The growth in private investment in the 1990s and early 2000s correlated with the economic reforms started in 1991. The subsequent decline has been linked to a slowdown in reforms and rising policy uncertainty.
• Government Measures and Tax Reforms
  • Tax Cuts: In 2019, the Indian government reduced corporate taxes from 30% to 22% to stimulate private investment. The aim was to make investing more attractive for businesses.
  • Facilitation of Tax Compliance: Simplification of tax compliance procedures and introduction of measures like the Goods and Services Tax (GST) have been designed to create a more business-friendly environment.
  • National Infrastructure Pipeline (NIP)
  • Regulatory Simplification: The government introduced the Single Window Clearance system to reduce the time and effort required to start and operate a business.
  • Online Processes: Digital platforms like the Ministry of Corporate Affairs (MCA) 21 portal have been introduced to streamline business registration and compliance processes.
  • Production Linked Incentive (PLI) Schemes: The PLI schemes offer incentives to companies for boosting domestic manufacturing in sectors such as electronics, textiles, and pharmaceuticals. The goal is to enhance competitiveness and attract foreign and domestic investment.
  • Sector-Specific Incentives: Various incentives and subsidies are offered in sectors like renewable energy, manufacturing, and technology to stimulate investment.
  • Banking Sector Improvements: Measures to strengthen the banking sector, including recapitalization of public sector banks and the introduction of the Insolvency and Bankruptcy Code (IBC), are aimed at improving credit availability and reducing non-performing assets (NPAs).
  • Development Finance Institutions: Support for institutions like the National Bank for Agriculture and Rural Development (NABARD) and the National Housing Bank (NHB) to enhance financing options for specific sectors.
  • FDI Liberalization: Reforms to relax FDI norms in various sectors, such as defense, retail, and aviation, to make India a more attractive destination for foreign investors.
  • Automatic Route Expansion: Expansion of the automatic route for FDI to simplify the process and reduce bureaucratic hurdles.
  • Startup India Initiative: Provides various benefits including tax exemptions, easier compliance norms, and funding support to encourage the growth of startups and innovative enterprises.
  • Innovation and Technology Support: Grants and funding opportunities for research and development (R&D) and innovation, including support for tech startups and incubators.
  • Special Economic Zones (SEZs): Creation of SEZs with incentives for businesses, including tax breaks and easier regulatory compliance, to attract investment in specific regions.
  • Industrial Corridors and Clusters: Development of industrial corridors and investment in industrial clusters to boost investment in targeted regions.