AA Edit | Do or Die Scenario for Firms

Prime Minister Narendra Modi has once again exhorted Indian businesses to invest more to benefit from free trade agreements that the country has entered into with several partners, including the European Union. His specific focus was on research and quality — which have become the most important elements for winning global competition. Modi’s diagnosis was spot on. Private corporate gross fixed capital formation (GFCF) has been on the decline since 2011-12, when it reached a historic high of 16.5 per cent of GDP. By 2017-18, private corporate GFCF slipped to 11.9 per cent and has remained thereabouts ever since.

Private investment hit a lowest level of 10.2 per cent in the Covid year of 2020-21. Though the economy recovered and corporate profits zoomed following the rollout of GST and the cut in corporate tax, private investment rose by barely 1.5 percentage points — something that the government finds unacceptable. Companies, on the other hand, rationalise their decision by citing weak demand, lower capacity utilisation, and policy uncertainty. Though revenue is showing robust growth, India is witnessing the premiumisation of the economy, indicating that a large section of people in the middle of the consumer pyramid is deferring buying decisions.

Government policy has also become uncertain. Though the Modi government promoted the Make in India programme in 2014 and offered production-linked incentives to boost local manufacturing, it did an about-turn in the wake of US tariffs and opened up the economy to competition from Europe and the US. While companies blame the Budget for not inspiring confidence among them to invest, India’s embrace of free trade will force them to invest for survival. Otherwise, multinationals will drive them out of business.