Private Firms in India Hold Back on Investment Despite Record Profits

Investments Indian Investments

Posted by NewAdmin on 2025-03-27 08:16:29 |

Share: Facebook | Twitter | Whatsapp | Linkedin Visits: 52

---

India's private sector has long struggled with investing in new factories and businesses, despite recording impressive profits. This puzzle has confounded policymakers for years. Since the global financial crisis of 2007, private investment as a share of GDP has steadily declined, even as the overall economy has posted world-leading growth. After a slight uptick in investment rates in 2022 and 2023, the most recent data from a major ratings agency reveals that private sector investment has once again fallen to a decade-low of 33% of total investments in India’s economy for this financial year.

Analysis from Icra, based on data from 4,500 listed companies and 8,000 unlisted firms, shows that while listed companies’ investment pace slowed, unlisted firms saw a decline in investment altogether.

This trend of stagnant private investment has been a concern for economists over the years. Banking magnate Uday Kotak has recently raised alarms about India’s fading “animal spirits,” urging young business owners who have inherited family firms to focus on creating new businesses rather than merely managing their existing wealth.

Data from investment advisory firm Value Research highlights that Indian non-financial businesses are sitting on cash worth 11% of their total assets, further underlining that companies are holding back from fresh investments. But what’s behind this reluctance?

Several factors are at play, including weak domestic consumption in urban areas, sluggish export demand, and a surge of cheap Chinese imports in certain sectors. According to Icra’s Chief Rating Officer, K Ravichandran, these issues have hindered Indian companies' plans to expand capacity.

More broadly, the lack of private investment is attributed to “global uncertainties and overcapacity,” as pointed out by India’s economic survey earlier this year. A reduction in private investment has serious implications for India’s long-term growth prospects.

Investment in assets like factories, machinery, and infrastructure—referred to as gross fixed capital formation—makes up roughly 30% of India’s GDP, making it the second-largest contributor after private consumption. However, India’s full-year GDP growth is expected to slow to 6.5%, down from 9.2% last year, largely due to a slowdown in consumption.

With key growth drivers like exports weakening and global uncertainties heightened by factors such as US President Donald Trump's tariffs, boosting private investment is critical for India to meet its long-term growth targets.

According to World Bank projections, India needs to grow at an average of 7.8% annually over the next 22 years to reach high-income status by 2047. This will require increasing both private and public investment to at least 40% of GDP, up from the current 33%.

The government has made substantial efforts to stimulate investment, including increased spending on infrastructure, cuts to corporate tax rates, and billions of dollars in production-linked subsidies to manufacturers. Additionally, access to bank credit is no longer a constraint, and regulatory restrictions have halved between 2003 and 2020.

Despite these efforts, corporate India has been slow to increase spending. As Sajjid Chinoy, JP Morgan India's Chief Economist, points out, the lack of demand in the economy is the main issue. India’s post-pandemic recovery has been uneven, with the consumer class expanding too slowly to drive demand for goods and services. This, coupled with falling wages, has further limited spending, even as corporate profits have hit a 15-year high.

Chinoy emphasizes that just because companies are financially strong doesn’t mean they’ll automatically invest. They’ll only do so if they see the potential for strong returns. "Companies will only invest if they expect good returns," he said at a recent event in Mumbai.

Rathin Roy, a former member of the Prime Minister's Economic Advisory Council (PMEAC), highlights deeper structural issues. He points out that entrepreneurs are lacking the energy to create goods that could generate new demand. For example, despite unsold inventory in urban areas, builders have been hesitant to expand into tier-two and tier-three towns to tap into new markets.

Roy also echoes Kotak's concerns about business heirs choosing to manage wealth rather than build new ventures. "During Covid-19, business houses discovered that they didn’t need to run businesses to make money—they could simply invest and multiply their wealth," Roy explains. Interestingly, much of this money is flowing out of India, seeking returns in global markets.

However, there are signs of a potential shift. Icra suggests that interest rate cuts and a $12 billion income tax relief for individuals in the federal budget could help support domestic consumption. Furthermore, India’s central bank has noted an increased intention from private companies to invest this year compared to the last, although the real impact of this intent remains to be seen.

Global trade uncertainties, particularly related to tariffs, may still delay any anticipated pick-up in investment, according to Icra. The challenge remains for India’s private companies to convert their financial strength into tangible investments in new factories and businesses, which are essential for long-term economic growth.

Go!