Recovery postponed: Survey indicates private sector has become cautious

After recovering sharply from the pandemic-related disruption, the Indian economy is said to be returning to its normal growth path. It is estimated to have grown 6.5 per cent in 2024-25, and the current year’s projections are also around the same level. However, India needs to grow at a much higher rate to achieve the stated goals. To improve growth outcomes in a sustainable manner, activity needs to improve across segments. One of the highlights of the Indian economy in the post-pandemic period has been higher government capital expenditure. The objective was, along with supporting growth, to have higher capex “crowd in” private investment. However, this has not happened to the level desired due to a variety of reasons. In this regard, following a recommendation of the parliamentary standing committee, the National Statistics Office has started conducting a forward-looking survey of the intentions of the private sector as regards capital investment. The results of the first such survey were released on Tuesday. 

The Ministry of Statistics and Programme Implementation must be commended on making the effort to implement the recommendation. Although the data is for a relatively small sample, it provides a glimpse into the expectations of the private sector. With improvement, such a survey can inform policymaking. In the present survey, only 2,172 enterprises submitted the data for five years. Manufacturing enterprises with a turnover of over ₹400 crore were considered, while trade enterprises with a turnover of ₹300 crore and more were included. Other enterprises had a lower threshold of ₹100 crore. The results show that after a substantial increase of over 55 per cent in capital expenditure in 2024-25, firms included in the survey are cautious in 2025-26, with a 25 per cent decline in the planned outlay. The number could improve over the year. Firms are often reluctant to disclose projects that have not been approved. Nevertheless, the results do indicate that they have become cautious. There are valid reasons for this. While growth in the Indian economy was settling at a normal rate, the trade-policy shift in the United States (US) has created enormous global uncertainty. Although projections, including those by the International Monetary Fund, suggest that the impact on India is likely to be limited, it is difficult to say anything with certainty at this stage.

 

An uncertain environment tends to discourage firms from investing, and this is happening across the world. However, things may change for India in the near term on two accounts. First, India is negotiating a bilateral-trade agreement with the US, and reports suggest things are moving in the right direction. A breakthrough will bring clarity for businesses. Second, several multinationals are looking to diversify away from China, and India can present itself as an attractive destination. It has been reported, for instance, that Apple intended to shift the production of all US-bound iPhones to India. Capturing such opportunities could substantially boost investment, employment, and growth. On domestic policy, while there is virtually no room for additional fiscal support, expected interest-rate cuts could provide monetary-policy support. However, the Reserve Bank of India needs to carefully weigh policy options. Excessive accommodation to support growth can have unintended consequences. In any case, firms are more driven by underlying demand conditions. The lacklustre state of private investment has been a weakness in the India growth story over the past several years.  An uncertain economic environment could further delay the turnaround.