20 Apr Declining Private Investment in India

THIS ARTICLE COVERS ‘DAILY CURRENT AFFAIRS’ AND THE TOPIC DETAILS OF ”Declining Private Investment in India ”. THIS TOPIC IS RELEVANT IN THE “ ECONOMY” SECTION OF THE UPSC CSE EXAM.

Why in the News?

Private investment has experienced a consistent decrease since the fiscal year 2011-12. The government has anticipated that major Indian corporations would increase their investment to fill this gap. Consequently, in 2019, the central government reduced corporate taxes from 30% to 22% with the expectation that this measure would stimulate private investment.

What is Private Investment?

Private investment refers to the investment made by private individuals or entities, such as businesses, corporations, or individuals, into various assets or projects with the expectation of generating a return on their investment. 

Gross Fixed Capital Formation (GFCF) refers to the total value of new fixed assets purchased by businesses, governments, and households within an economy during a specific period. These fixed assets include machinery, equipment, buildings, infrastructure, and other physical assets that are used for production over a long period. GFCF is a key indicator of investment in an economy and is often used to measure the level of economic activity and growth.

Importance of GFCF in the Economy

• Stimulating Economic Growth: GFCF is a significant driver of economic growth. Increased investment in fixed capital leads to enhanced production capacity, productivity, and efficiency, which can boost overall economic output.
• Infrastructure Development: GFCF plays a crucial role in infrastructure development, including roads, bridges, railways, ports, and telecommunications networks. Improved infrastructure facilitates smoother transportation of goods and services, reduces transaction costs, and fosters economic development.
• Employment Opportunity: Investment in fixed capital often requires labor, leading to job creation across various sectors of the economy. This contributes to reducing unemployment rates and improving living standards.
• Technological Advancement: GFCF enables businesses to invest in new technologies and innovative processes, leading to technological advancement and industrial modernization. This, in turn, enhances competitiveness and fosters long-term economic growth.
• Attracting Foreign Investment: A high level of GFCF signals a favorable investment climate, which can attract foreign investors looking for opportunities to expand their operations or enter new markets. This can lead to increased foreign direct investment (FDI), bringing in additional capital and expertise.
• Resilience to Economic Shocks: Economies with robust levels of GFCF are often better equipped to withstand economic downturns. Investment in fixed capital creates a foundation for future growth and can buffer against short-term shocks by maintaining or even increasing productive capacity.
• Long-term economic planning: GFCF data is used by governments and policymakers to plan for long-term economic development. By analyzing trends in GFCF, they can identify areas where investments need to be increased or decreased to achieve specific economic goals.

Current Trends of Private Investments in India

• In India, private investment experienced a significant increase primarily following the economic reforms of the late 1980s and early 1990s, which bolstered confidence in the private sector.
• Before economic liberalization, private investment mostly hovered around or slightly above 10% of the GDP, while public investment as a percentage of GDP consistently rose from less than 3% in 1950-51 to surpass private investment by the early 1980s. However, public investment started declining after liberalization, with private investment taking the lead in fixed capital formation. This surge in private investment continued until the global financial crisis of 2007-08, during which it peaked at around 27% of GDP from about 10% in the 1980s. 
• However, since 2011-12, private investment has been declining and reached a low point of 19.6% of GDP in 2020-21.

Why is Private investment falling in India?

• Decline in Private consumption expenditure: A decrease in private consumption expenditure indicates reduced spending by households on goods and services. This could be due to factors such as lower disposable income, consumer pessimism, or economic uncertainty. When demand weakens, businesses may respond by scaling back their investment plans to align with lower expected sales, leading to a decline in private investment.
• Policy uncertainties: The Indian government has been implementing various policies and reforms, such as the Goods and Services Tax (GST) and demonetization, which have created uncertainties in the business environment. These policy changes have led to a temporary slowdown in private investment as businesses adjust to the new regulations.
• Banking sector stress: The Indian banking sector has been facing stress due to bad loans and capital shortages. This has led to a slowdown in credit disbursement, which in turn affects private investment as businesses find it harder to secure loans for their projects.
• Complex Labor laws: The complex labor laws in India can create difficulties for businesses, making it harder for them to operate and invest in the country. Simplifying labor laws and making them more business-friendly can help boost private investment.
• Bureaucratic hurdles: Red tape and bureaucratic hurdles can slow down project approvals and make it difficult for businesses to invest in India. Efforts to streamline the process of project approvals and reduce bureaucratic hurdles can encourage private investment.

Wayforward for India 

• Ease of Doing Business: The government should focus on improving the ease of doing business in India by simplifying regulations, reducing bureaucratic red tape, and ensuring transparent processes. This will make it easier for private companies to invest and operate in India.
• Tax Incentives: The government can provide tax incentives and exemptions to private sector companies that invest in India. This can include deductions on investment, lower corporate tax rates, and exemptions from certain taxes for a specific period.
• Infrastructure Development: The government should invest in the development of infrastructure, such as roads, ports, airports, and power plants, to create a conducive environment for private sector investment. This will help in the growth of various industries and create more jobs.
• Skill Development and Education: The government should focus on improving the quality of education and skill development in India. This will ensure a skilled workforce is available for private sector companies, which can attract investments.
• Promote Public-Private Partnerships (PPPs): The government should encourage PPPs in sectors such as infrastructure, energy, and healthcare, allowing private sector companies to collaborate with the government in delivering public services.
• Create a favorable investment climate: The government should create a favorable investment climate by ensuring the protection of investors’ rights, providing a level playing field for all investors, and ensuring transparency in the investment process.

Download plutus ias current affairs eng med 20th April 2024

Prelims Based Question

Q1. Consider the following statements regarding Private Investment in India:

1. Private investment in India has experienced a consistent decline since the fiscal year 2011-12.
2. High Private Investment fosters long-term economic growth.

Choose the correct answer using the codes given below:

(a). 1 Only

(b). 2 Only

(c). Both 1 and 2

(d). Neither 1 nor 2

ANSWER: C

Mains Based Question

Q1. Critically assess the reasons behind the recent decline in private investment in India. Examine potential strategies and policy measures to encourage private sector investment in India.

Vikas Agarwal