Incremental investment

India needs reforms on multiple fronts

The new working-paper released by the Economic Advisory Council to the Prime Minister (EAC-PM) highlights a central weakness in India’s post-pandemic recovery. Corporate profitability has revived much faster than investment. Profits before interest and tax (PBIT) grew 21.4 per cent in 2023-24, while gross fixed assets rose just 6.1 per cent, creating a 15.3 percentage-point gap. Investment has recovered from the pandemic shock, but the recovery remains weak. This matters because the investment decision depends less on profits earned on existing assets than on the expected return on the next unit of capital. The paper finds evidence of downward pressure on investment from declining marginal profitability. Firms can remain profitable on their existing asset base while postponing fresh capex if new capacity is not expected to generate comparable returns. Greater competition from domestic firms and imports, global industrial overcapacity, and the possibility of faster technological obsolescence are among the factors the paper identifies as possible contributors.

 

India does not simply need policies that induce firms to spend more; it needs policies that make productive investment more profitable. In this context, a recent NITI Aayog-Crisil road map for turning India into a global manufacturing hub identifies 12 sectors with potential for global leadership, and stresses scale, infrastructure, technology, skills, domestic value addition, and deeper integration with global value chains. India’s manufacturing share has remained broadly stuck at 16-18 per cent of gross value added for two decades, while logistics and infrastructure gaps, fragmented micro, small and medium enterprises, and limited economies of scale continue to constrain competitiveness. Cluster-based manufacturing can address some of these constraints. Integrated industrial parks with shared utilities, logistics, testing facilities, and streamlined approvals can lower fixed and operating costs, facilitate supplier linkages, and help firms achieve scale. Tariff rationalisation too must be part of this effort. High duties on imported intermediates and components raise the cost of domestic production and act as an implicit tax on exports. In modern manufacturing, where production is spread across countries, access to competitively priced intermediate inputs is essential for participation in global value chains. A simpler and lower tariff structure would, therefore, strengthen the case for manufacturing investment by reducing input costs and improving export competitiveness.

 

The argument about global value chains is especially important. India’s share in global manufacturing value added rose from about 1.5 per cent in 1995 to 3.2 per cent in 2023, whereas China’s rose from about 5 per cent to nearly 32 per cent. Clearly, firms need access to large export markets, reliable suppliers, technology and scale. Recent trade agreements will translate into limited gains unless domestic tariffs, logistics and investment conditions allow Indian firms to plug into global production networks. Technology capability also needs attention. The EAC-PM paper points to the absence of highly innovative “superstar” firms as one reason why the earlier investment spike has not returned. India’s gross expenditure on research & development was only 0.6-0.7 per cent of gross domestic product in 2025, compared with roughly 3.45 per cent in the United States and 2.58 per cent in China. The objective should be not to subsidise capex indefinitely. Instead, durable private investment will emerge only when firms see sustained commercial returns.