In a meeting held with the country’s corporate leaders on September 15, Finance Minister Nirmala Sitharaman drew attention to an important aspect of the economy today. She rightly flagged concerns about sluggish corporate investment, despite the government’s business-friendly stance, including a reduction in the corporate tax. The reduction, effected in 2019, lowered the rate for existing companies to 22% from 30% and for new manufacturing companies to 15% from 25%. However, the corporate investment rate, i.e., investment as a share of the national income, has barely budged. Ms. Sitharaman challenged corporate leaders to invest, asking rhetorically whether, like Hanuman in the Ramayana, they needed to be reminded of their inborn strength. The analogy is mismatched, though. For, while Hanuman was so devoted to Lord Rama that he was ready to risk his life serving him, private firms are driven by profit expectations. Managers are averse to risk, and unlikely to rush to invest based on exhortation from a Minister if they do not anticipate enough profits. Private investment accounts for close to 75% of total capital formation in the economy; its revival therefore is essential for sustained growth of the economy.
Decline of private capital formation
The Narendra Modi government’s first pronouncements in 2014 had conveyed that it desired a shift away from a state-driven model of economic development. This much was apparent in its slogan ‘minimum government’. If this was to be, the private sector would take the lead in driving the economy. Mr. Modi had a reputation as a business-friendly Chief Minister of Gujarat. Upon reaching Delhi, he emphasised that his government would improve the ease of doing business in India. This by itself is a worthy objective, as anyone familiar with the working of the regulatory apparatus in India would agree.
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