India's Investment Dilemma: Record Profits, Minimal Spending

India's corporate investment has fallen to a decade low, even as profits soar. Analysts attribute this trend to weak domestic consumption, global economic uncertainties, and a lack of perceived demand for new capacities. While the government has ramped up spending and cut tax rates to encourage growth, the willingness to invest remains stagnant, with many firms opting to manage existing wealth rather than pursuing expansion.

India's private sector investment is witnessing an alarming downward trend, with expenditure dropping to its lowest level in ten years. Despite reporting record profits, Indian companies are hesitant to reinvest in new projects or infrastructures, raising questions about the underlying reasons behind this reluctance.

The trend has been apparent for over a decade, as private investment as a share of GDP has steadily declined following the global financial crisis of 2007. In 2022 and 2023, although there was a slight recovery, recent findings from Icra—a leading ratings agency—show that private sector investment has again dipped to only 33% of overall investments in the economy. Analysis of 4,500 listed companies and 8,000 unlisted firms reveals a substantial slowdown in funding from both categories, with unlisted firms particularly showing a marked contraction.

The persistent decline of private investment has been a topic of concern for economists. Influential banking figure Uday Kotak has drawn attention to the fading "animal spirits" among business owners, many of whom are opting to preserve their wealth rather than pursue new business ventures. Complementing this view, investment firm Value Research indicates that Indian non-financial companies currently hold 11% of their total assets in cash, further signifying a reluctance to engage in fresh investment opportunities.

Several factors contribute to this cautious approach. Weaker domestic consumption, particularly in urban areas, along with muted export demand and a surge in inexpensive Chinese imports, have stifled capital expansion plans. Additionally, broader global economic uncertainties, as outlined by India's economic survey, have dissuaded private companies from committing to new investments.

This stagnation carries significant implications for India's economic outlook, as corporate investment directly impacts GDP. Gross fixed capital formation—which includes investments in factories, machinery, and construction—constitutes approximately 30% of GDP, making it crucial for sustained economic growth. India's GDP growth is projected at 6.5% for the full year, down sharply from last year’s impressive growth of 9.2%.

Economists assert that to achieve its long-term growth targets, India will need to ramp up private and public investment to 40% of GDP over time, a substantial increase from the current 33%. The government has made considerable efforts to stimulate this environment, including significant infrastructure spending, corporate tax cuts from 30% to 22%, and substantial production-linked subsidies. Yet, these measures have not significantly prompted corporate investment.

JP Morgan's Chief Economist for India, Sajjid Chinoy, highlights that the core issue lies in insufficient demand within the economy to justify new capacity builds. Although corporate profitability has reached a 15-year high, the uneven post-pandemic recovery means many consumers cannot spend as they did before, crippling new demand for products and services.

Experts, such as former PMEAC member Rathin Roy, point to deeper systemic issues impeding investment enthusiasm; entrepreneurs appear less inclined to innovate or expand markets. Notably, a trend has emerged where business heirs are managing wealth rather than fostering new enterprises. According to Roy, the Covid-19 pandemic revealed that wealth can be multiplied without actively doing business, prompting many to seek opportunities abroad for investment.

Despite these pessimistic trends, Icra notes signs of potential recovery. Interest rate reductions and tax relief aimed at individuals may bolster domestic consumption. Moreover, India's central bank reports an increase in interest towards investment among private firms this year, although actual deployment of funds remains uncertain amid ongoing global trade tariff complexities.