Private capital expenditure: New project announcements in India declined significantly in the December 2024 quarter, indicating a slowdown in investment activity. The private sector has curtailed spending on new factories and other long-term assets, raising concerns about a capital expenditure (capex) slowdown. Data from the Centre for Monitoring Indian Economy (CMIE) revealed a sharp 22% year-on-year drop in the total value of new project announcements, which stood at Rs 6 trillion. Compounding this trend was a staggering 52% year-on-year plunge in the value of completed projects, falling below Rs 1 trillion.
As of December 2024, both new and completed project values remain below pre-pandemic levels seen in 2019. Even government infrastructure projects, such as new roads, have slowed. Although the government and selective large-scale private investments—notably in the aviation sector—have supported capital expenditure, the government has repeatedly urged India Inc. to accelerate its investment pace.
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Factors behind the cautious stance
Several factors contribute to the private sector’s reluctance to invest. The uncertain geopolitical landscape deters companies from committing to large-scale projects without a clear understanding of evolving global dynamics. Structural challenges, such as inadequate land and labour reforms, also impede growth. A scarcity of skilled labour has become increasingly evident, with high demand pushing up wage expectations.
The Insolvency and Bankruptcy Code (IBC) has also influenced corporate behaviour. High-profile bankruptcies, including Jet Airways, Essar, and Videocon, have heightened awareness of financial risks. The ability of banks to seize the assets of defaulting companies has instilled a sense of prudence, prompting corporates to prioritise financial stability over expansion.
Moreover, companies are hesitant to make massive investments without strong demand. The past few months have seen tepid consumer spending, even during the festive season, discouraging companies from expanding. Corporate commentary from consumer goods firms has highlighted a demand slowdown, further dampening the outlook for new capital expenditure.
Demand a key driver of capex
Without a substantial increase in demand for manufactured goods, average capacity utilisation rates are unlikely to reach levels that justify additional private-sector capacity. As a result, India Inc. remains focused on protecting margins rather than committing to new projects. Unless private players regain confidence to invest in new capacity, a capex revival remains unlikely.
According to the Reserve Bank of India’s (RBI) Systematic Risk Survey, a revival in the private investment cycle is improbable in the coming year. This contrasts with RBI Governor Sanjay Malhotra’s optimistic foreword in the biannual Financial Stability Report (FSR), where he forecasted economic growth revival in 2025, supported by robust consumer and business confidence. Malhotra pointed to strong corporate balance sheets and high profitability as reasons for optimism, yet capex revival remains an unresolved challenge.
Economic implications of investment stagnation
A stagnation of investments risks slower economic growth and missed opportunities for job creation and technological advancement. While leading conglomerates and public sector undertakings (PSUs) have committed to significant investments, the anticipated broad-based upswing in private capex has yet to materialise.
The government has emphasised that its spending on infrastructure and public goods is essential but cannot substitute the efficiency and dynamism private capital brings. Private investments drive a virtuous cycle of consumption and job creation, as private investors are often more efficient at allocating resources. However, new investments remain concentrated among a limited number of major players, insufficient to sustain India’s long-term growth trajectory.
To rectify the situation, policymakers must address structural challenges. First, creating more productive jobs can significantly boost purchasing power, increasing consumer demand. Second, questions must be raised about why employment growth in sectors like construction and logistics has not translated into better wages. Analysts also blame inflation for eroding household consumption power. High food inflation, in particular, reduces room for discretionary spending.
Private capital expenditure and policy uncertainty
Economists have long argued that policy uncertainty deters private investment. The surge in private investment during the 1990s and 2000s coincided with the wave of economic reforms initiated in 1991. Conversely, the deceleration of reforms under successive governments correlates with a decline in private investment. Investors require a stable and predictable policy environment to undertake risky, long-term projects.
Strong consumption spending is key to giving businesses the confidence to invest in building fixed capital. Economists recommend that the government put more money into the hands of people to boost consumption expenditure and, in turn, private investment.
Given that many of these issues cannot be resolved in the short term, the government must shoulder the burden of ensuring high capex. Alternatively, policymakers could heed economists’ advice on fostering a more investment-friendly environment. Until then, the path to a broad-based capex revival remains uncertain.