Home About Us
About Jigyasa IAS Mission & Vision Director’s Message
UPSC CSE
About Civil Services Examination Eligibility Criteria for CSE CSE Exam Pattern How to prepare for CSE How to choose optional subject
Courses
GS Foundation Course Sociology Optional Courses Guided Preparation Module Daily Rigorous Answer Writing
Daily Feeds
Daily Current Affairs Editorials Daily Quiz Free Answer Writing
Useful Links
About Prelims About Mains About Interview Daily Study Guideline Essential Book List
Downloads
NCERT Book List Govt. Welfare Schemes Daily Downloads
Contact Us
Blog Login

Decline in Private Capital Formation

ECONOMY FINANCE
10 Oct, 2022

NEWS HIGHLIGHTS

Theme : Economy
Paper :GS - 3

Finance Minister flagged concerns about sluggish corporate investment, despite the government’s business friendly stance, including a reduction in the corporate tax.
Corporate investment is an investment that is made by companies rather than by governments or individual people. Corporate investing simply means investing the profits / surplus cash of your business, instead of drawing it as income or holding it in cash bank accounts.

TABLE OF CONTENT

  1. Context
  2. Corporate Investment
  3. Capital Investment
  4. Present Scenario of Corporate Investment in Indian Economy
  5. Why is there a decline in Private Capital Formation?
  6. Conducive Environment for Private Investment in India?
  7. Road Ahead

Context : Finance Minister flagged concerns about sluggish corporate investment, despite the government’s business friendly stance, including a reduction in the corporate tax.

Corporate Investment :

  • Corporate investment is an investment that is made by companies rather than by governments or individual people. Corporate investing simply means investing the profits / surplus cash of your business, instead of drawing it as income or holding it in cash bank accounts.

Capital Investment :

  • Capital investment is the acquisition of physical assets by a company for use in furthering its long-term business goals and objectives. Real estate, manufacturing plants, and machinery are among the assets that are purchased as capital investments.

Present Scenario of Corporate Investment in Indian Economy :

  • Gross capital formation (GCF): Over 90% of GCF consists of fixed investments.The National Accounts Statistics provides disaggregation of gross capital formation (GCF) by sectors, type of assets and modes of financing.
  • Share of Private investment: 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.
  • No change in investment distribution: The investment distribution has hardly changed over the last decade, with the public sector’s share remaining 20%.
  • Fall in share of agriculture and industry: Between 2014-15 and 2019-20, the shares of agriculture and industry in fixed capital formation/GDP fell from 7.7% and 33.7% to 6.4% and 32.5%, respectively.

Why is there a decline in Private Capital Formation?

  • Low productivity of companies: Very low productivity of capital for Indian companies at 2-3% despite the cost tailwinds in FY21 due to the pandemic shock.
  • Low Government spending: Despite the bump-up in capital allocations by government (30% YoY) the progress towards improving the mix of government spending towards capital outlay has been moderate.
  • Dismal Public capital formation: Capex as % of total spending has increased marginally to 16.5%, and its impact on overall capital formation has been less than 4% of GDP; overall public sector capital formation has remained low at 7% of GDP (vs 9% in FY08).
  • No crowding in: While total government revenue spending in nominal terms remained higher compared to our framework (averaging at 12% YoY during FY11-FY21), the real growth has been modest, averaging at 5.8%. Thus, amid the declining trade/GDP ratio, weak private capex, rising unemployment and several shocks the crowding in the role of fiscal expansion has been missing.
  • Declining savings rate: India’s saving rate continues to decline.

Conducive Environment for Private Investment in India?

  • Improved financial condition: There has been considerable improvement in external balance position, including CAD turning surplus in FY21 at 0.9% of GDP, steep rise in RBI’s forex buffer. Favorable financial conditions have enabled fund raising by many sectors, including banks.
  • Deleveraging of corporate balance sheets: There is a sharp decline in debt/equity ratio of the non-financial sector for BSE500 companies (constant set of companies existing since 1998) to 63% in FY21 from 92% in FY20.
  • Declining NPA’s: Higher capital base of banks (CAR at 15.8% in FY21), lower NPAs (7.5% of advances) and deleverage corporate balance sheets are necessary buffers for private capex revival and ability of banks to fund it.

Road Ahead :

  • The investment must be focused on productivity-enhancing infrastructure. Here, some tied transfer of funds to the States would be desirable, as they are better placed to identify such investment.
  • Inflation can derail a high public investment programme due to the disaffection it generates. Its control would require a step-up in the growth of agricultural produce other than the superior cereals. In fact, this should be seen as an opportunity to end India’s import dependence on edible oils and the persisting shortfall in the supply of vegetables.

FAQs :

1. What is Capital Investment?

Answer : Capital investment is the acquisition of physical assets by a company for use in furthering its long-term business goals and objectives. Real estate, manufacturing plants, and machinery are among the assets that are purchased as capital investments.

2. What is Corporate Investment?

Answer : Corporate investment is an investment that is made by companies rather than by governments or individual people. Corporate investing simply means investing the profits / surplus cash of your business, instead of drawing it as income or holding it in cash bank accounts.