Context: According to data released by the Ministry of Statistics and Programme Implementation (MoSPI), India’s Index of Industrial Production (IIP) growth fell to 1.2% in May 2025, the lowest in nine months.
Despite various government steps like tax cuts, infrastructure spending (capex), and low interest rates, private sector investment is not picking up and lagging behind.
Relevance of the Topic: Prelims: Trends & factors associated with Low corporate investment.
State of Corporate Investment in India
The 2024-25 Economic Survey expressed concern, noting that:
- The corporate sector is enjoying record-high financial performance. However, there has been negligible growth in hiring and employee compensation.
- Private-sector Gross Fixed Capital Formation (GFCF) in machinery, equipment, and intellectual property has grown only 35% cumulatively over four years- indicating weak investment momentum.
Why is Corporate Investment Lagging Behind ?
- Low Consumer Demand: After COVID-19, overall demand in the economy is weak. When people are not buying enough, companies see no reason to invest in expanding production.
- Underutilisation of Existing Capacity: Firms are hesitant to invest when their existing facilities are not being used to full capacity, fearing low returns from added production.
- Slow Export Demand: The global economic slowdown, combined with rising trade protectionism and tariff regimes (such as the reciprocal tariff measures by the US), has weakened external demand for Indian goods. This uncertain global environment discourages firms from undertaking export-oriented investments.
- Delay in Impact of Government Capex Projects: Projects like ports and highways have long gestation periods, the time lag between investment and tangible economic returns delays their crowd-in effect on private investment. So, their benefits do not immediately encourage private investment.
- High Import Content in Capex: A part of the government's capital expenditure goes into imported machinery and technology. This does not help Indian industries and reduces the positive impact on local demand.
- Low Labour Intensity of Projects: Many infrastructure projects use heavy machines instead of workers. This means fewer jobs are created, so income and consumption do not rise much.
- Low interest rates are not enough: Even if loans are cheap, companies would not borrow unless they believe they can sell their products and make profits.
- Weak Link profits and investment: The assumption that higher profits will automatically lead to greater private investment is flawed. As per renowned economist Kalecki, firms can choose to invest but cannot ensure profits. In a weak demand environment, profitability alone does not incentivise capacity expansion.
Thus, tax cuts or higher earnings do not translate into investment unless backed by strong demand prospects.
Way Forward
- Increase government expenditure to act as an external stimulus for reviving investment.
- Focus on reviving demand, as investment will follow recovery, not lead it.
- Prioritise high-multiplier and short-gestation projects to generate quicker economic impact.
- Minimise import content in capex to ensure maximum domestic demand generation.
- Promote labour-intensive investments to boost employment and consumption.
- Recognise that low interest rates alone cannot drive investment without demand.
- Restore both credit flow and business confidence, as both are necessary for recovery.
The slowdown in corporate investment in India is mainly due to weak demand and delays in the impact of government spending, not because companies lack profits or funds.