Why are corporates not putting their money where their mouth is?

Prime Minister Narendra Modi recently called upon the private sector to increase investments in the Indian economy “just like the government, so that the country gets maximum benefit from it”. At a very basic level, fresh investments in the economy create new jobs. This, in turn, helps people earn better. Better earnings fuel private consumption, which, in turn, creates more jobs. At a simple level, this is how the cycle works. Hence, the importance of private companies investing in the economy.

If one were to simply go by the kind of statements that CEOs and industry lobbies have been making, one would be forced to assume that private investments are booming. In fact, the CII Business Confidence Index jumped to its highest in almost two years during October-December 2022. This reflects “the optimism around India being in a ‘sweet spot’ despite the rising global uncertainties,” the survey said. CII is a business lobby.

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Trouble is, this optimism doesn’t really show up in the data. In a recent research note, economists Nikhil Gupta and Yaswi Agarwal of Motilal Oswal estimate that corporate investments grew by 22.6 per cent during the first nine months of 2022-23 (April to December 2022). On the face of it, this sounds like very fast growth and reflective of the optimistic statements made by corporate bosses. But the 22.6 per cent growth comes on the back of very slow growth in corporate investments from 2019-20 to 2021-22, when they grew by just 1.7 per cent per year, against 10.8 per cent per year from 2009-10 to 2018-19. In fact, if one were to adjust for the high inflation, corporate investments in real
terms may have actually contracted during the period.

In that sense, the corporate investments this year are more or less catching up, given slow growth in investments during the Covid years. This is something that the bold statements by corporates don’t seem to take into account. Nuance doesn’t seem to be a strong point of anyone these days, neither financial influencers nor corporates.

In fact, as Gupta and Agarwal point out, during the first nine months of 2022-23, the capital expenditure made by corporates stood at 14.5 per cent of GDP. This is lower than the investments in the pre-Covid period.

Clearly, corporate investments aren’t back to where they were before the pandemic hit. Why is that the case? One reason is that capacity utilisation of companies still remains a worry. Data from the Reserve Bank of India shows that capacity utilisation during the period July to September 2022 (the latest data available) stood at 74 per cent. This is better than the 69.9 per cent recorded during January-March 2020, but still lower than the 76.1 per cent recorded during January-March 2019.

Take the case of the two-wheeler manufacturing sector. The total sales (domestic plus exports) during 2018-19, before the pandemic, was 24.5 million units; that in 2021-22 was a much lower 17.9 million units. The sales during April 2022 to January 2023, the first 10 months of 2022-23, was 16.6 million units.

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The point being that the sales in every year since 2018-19 have been lower than the sales in 2018-19. The same is expected for 2022-23. This implies that the two-wheeler companies have a lot of free capacity. In this scenario, they have no real reason to invest more money and expand their current capacity.

In fact, during April-December 2022, the size of the manufacturing sector has been more or less flat compared to the same period in 2021.

Why is this the case? This stems from the fact that the post pandemic K-shaped economic recovery has slowed down consumption among the less-well-to-do section of the population. In a K-shaped economic recovery, the well-to-do section of the population does well. The rest don’t. This has turned the entire thing into a chicken-and-egg story. Investments are needed to get consumption going, and consumption is needed to get investments going.

So, finally, what explains the overoptimism of corporates? Perhaps a short memory -- they have forgotten that investment growth during the Covid years was very slow. Or the fact that business heads, by the very definition of what they do, need to be overoptimistic. Whatever be the reason, the fact of the matter is, talk is cheap. The optimism needs to be backed with corporate investments reaching a point where they are, first, similar to, and then greater than, the investments before the Covid pandemic. At the end of the day, actions still speak louder than words.