Reimagining private investment landscape in India

Private investment in the Indian economy and its reforms were priorities for the Modi government when the 10-point vision was brought out in 2014 and was later broadly undertaken across the country. In India, private investment through the purchase of capital assets has focused on value addition and income production, which are inevitably linked with India’s gross capital formation (GCF), household consumption, and exports. However, with the advent of the Covid-19 pandemic in late 2019 to early 2020, the investment and development in sectors like land, building construction, and the purchase of machinery and equipment have taken a huge hit, the highest since the Great Recession in the early 20th century. Furthermore, due to the pandemic, both investment and savings in the country have fallen and require a huge turnaround by creating a prudent regulatory landscape that supports the revival of private investments.

However, despite the huge challenges over the last decade and the impact of the pandemic, India has seen massive improvements, as evident in India’s rise in its Ease of Doing Business rankings from 142 in 2014 to 63 in 2022. In the post-Covid era, the Modi government, rather than focusing on infrastructure investment through direct finance, has largely focused on creating a regulatory and market environment that facilitates private investment.

According to the Centre for Monitoring Indian Economy (CMIE), the V-shaped recovery of the Indian economy post-pandemic has been considered a significant incentive for private investments to undertake further activities in the Indian economy. Furthermore, there have been reports that “a recovery in private capex is underway,” though the impact and implications are still unclear in terms of its future trajectory. However, based on the CMIE data, the capex aggregates for new and completed projects in the first and second quarters, of 2022 (March–June) have dropped by 47.25 per cent and 8.53 per cent, respectively. Meanwhile, revived projects reached $280 billion in June 2022, dropping by 12.5 per cent compared to March 2022.

Interestingly, Morgan Stanley economist Chetan Ahya recently reported that the growth in private projects under implementation rose to a decade-high of 9.2 per cent in late June 2022. Domestic demand indicates a huge turnaround linked to the revival of private investment and capacity by companies, enterprises, and other businesses. A positive trend for the economy, on a quarterly basis, has been reduced by 37.21 per cent in June 2022 compared to March 2022, while the implementation of stalled projects in the country has increased by 222 per cent, one of the highest amongst major economies worldwide. Among states, Tamil Nadu is leading in terms of its support for investments, reaching Rs 352 billion, followed by Gujarat with Rs 435 billion. Maharashtra and Tamil Nadu have the highest state GDPs in the country, while Karnataka has the world’s fourth-largest technology cluster, in Bengaluru, with a vast potential to expand further.

The government has launched initiatives like the Atmanirbhar Bharat Abhiyaan, the Production Linked Incentive (PLI) scheme, the India Industrial Land Bank, investment missions under the Prime Minister’s Science, Technology, and Innovation Advisory Council (PM-STIAC), etc. Further, in September 2022, the Modi government launched the National Logistics Policy (NLP) to boost the Ease of Doing Business parameters and enhance the liveability quotient, which has a considerable role in increasing private investment (and foreign private investment). This can “address cost and inefficiency by laying down an overarching interdisciplinary, cross-sectoral, and multi-jurisdictional framework for the development” of the pan-India logistics ecosystem.

Various measures are necessary to revive private investment in the Indian economy. Firstly, the government should prioritise gradualistic structural changes that are discussed with various stakeholders before their implementation, with options to roll back or limit the implementation should any complexities emerge, both domestically and internationally.

Secondly, there should be an increased focus on strategic disinvestment and privatisation, including options to address and/or circumvent challenges and shortcomings. This should encourage private sector participation, which adheres to transparency and accountability in the processes towards privatisation. Thirdly, the current caps for FDI from multinational and transnational companies should be re-examined. It should be internationalised in terms of standardisation, benchmarking, and digitisation of the regulatory landscape for FDI in the country. Fourthly, reforms in direct and corporate taxes are a very important prerequisite. The reforms should mainly focus on reducing the marginal effective tax rates (METRs), which are among the highest in the world. Fifthly, the dispute resolution mechanism for issues related to private investment should be streamlined and provided with a much more coherent system to deal with challenges that arise.

The challenges and issues facing judicial systems and tribunals in dealing with the increasing number of cases and arbitration should be dealt with prudently. This is very important for improving India’s ease of doing business ecosystem, the efficiency of the regulatory landscape, and spurring economic growth through investment and related technology transfer.

(The writer is an assistant professor at the Department of International Studies, Political Science, and History, Christ (Deemed to be University)).