India: Why are government investments growing but those of companies falling?

NEW DELHI — India's economy is booming. Share prices have been among the best performers in the world. Government investment in airports, bridges, roads and clean energy infrastructure is visible almost everywhere. India's gross domestic product is expected to rise 6 percent this year — faster than that of the United States or China.

But the money Indian companies invest in the future of their businesses, in things like new machines and factories, has stagnated. As a fraction of India's economy, it has contracted. And long-term foreign investment has been declining.

Soon, the Government will need to reduce its extraordinary spending, which could weigh on the economy if private sector money does not rebound.

No one expects India to stop growing, but a 6 percent increase is not enough to meet its ambitions. India's population, now the largest in the world, is growing. His government has set a goal of catching up with China and becoming a developed nation by 2047. That kind of leap will require sustained growth of around 8 or 9 percent annually, most economists say.

The missing investment could present a challenge to Narendra Modi, the Prime Minister, who has focused on making it easier for foreign and Indian companies to do business in India. He faces elections in the spring.

One point on which there is widespread agreement is that India should benefit from China's slowdown, which has been driven by a housing crisis. China's geopolitical tensions with the West present another opportunity for India, motivating foreign companies to shift production in China to other countries.

The World Bank, whose mission is to boost developing economies, says it is critical that billions of dollars in government spending on infrastructure needs unleash an explosion of corporate spending.

“Public investment is not enough to accelerate the growth of confidence,” Auguste Tano Kouamé, World Bank country director for India, said in April. “Further reforms are needed to get the private sector to invest.”

The lack of confidence helps explain why stock markets have been breaking records, even as foreign investors have stepped back from participating in the Indian economy via startups and acquisitions. A recent annual average of $40 billion in foreign direct investment has dropped to $13 billion last year.

One reason companies have been watching and waiting to invest is the powerful Modi government. On the one hand, businesses crave stability in political leadership, and India has rarely, if ever, had such an entrenched leader. Modi seems to have assured re-election and is openly pro-private initiative.

But his government plays an interventionist role in managing the economy, in a way that can make it dangerous for companies to place bets. In July, the government imposed a 28 percent retroactive tax on online gambling companies, destroying an industry valued at $1.5 billion overnight.

Foreign officials complain that much of the traditional pain of doing business in India persists.

Another factor holding back long-term investment is that in a population of 1.4 billion, only about 20 million Indians are doing well enough to buy European products, build luxury homes and support the top tier of the automotive sector.

Most of the rest of the population is struggling with inflation in food and fuel prices. Banks have been granting credit to consumers of both types, but less to companies, which fear that the vast majority of their clients will tighten their belts in the coming years.

“At the moment, there is no evidence that investors are comfortable with India,” said Arvind Subramanian, an economist at Brown University in Rhode Island who served under the Modi government as chief economic adviser from 2014 to 2018.

The big question is whether India can wrest a significant share of global business from China. The most notable example is Apple, which is slowly moving part of its supply chain away from China. About 7 percent of the world's iPhones are made in India, and JPMorgan Chase has estimated that Apple aims for 25 percent by 2025. At that point, all kinds of things will be possible for India.

“We must keep an open mind,” Subramanian said.

By: ALEX TRAVELLI