A general view of Mundra Port in India. The Indian government is spending heavily to keep GDP humming -- a challenge now compounded by a 50 percent US tariff on Indian exports. Photo: AFP/FILE
India's blistering growth has a quality problem. GDP is speeding ahead at 8 percent in the world's fifth-largest economy but the government is doing the heavy lifting on investment. Policymakers have spent years trying to coax companies into spending more, with limited success. The result: growth that looks fast but feels flimsy.
Since coming to power in 2014, Prime Minister Narendra Modi has cut corporate taxes, subsidised manufacturing ventures and introduced a bankruptcy law. Some of that effort is paying off. Multinationals including Alphabet's Google and tycoon-backed groups like Adani, Reliance Industries and Tata Consultancy Services are pouring cash into industries of the future from renewable power to artificial intelligence-ready infrastructure.
But India Inc's outlay is not keeping pace with the $4 trillion economy's expansion.
Private firms' investments contributed 34.4 percent to asset creation in the year to the end of March 2024, the lowest share in over a decade. Their share in real GDP fell to 11.5 percent from a peak of about 13 percent eight years earlier.
These trends force the government to spend heavily to keep GDP humming -- a challenge now compounded by a 50 percent US tariff on Indian exports. Globally, tariff uncertainty and a flood of cheap Chinese goods have made companies cautious. But India's muted animal spirits are a stubborn long-term problem.
The result is a paradox: global investors are cheering India's world-beating growth, which hit an annualised 8.2 percent in the September quarter, buoyed by tax cuts ahead of the festive season. Yet behind the headlines, policymakers and company executives are sounding the alarm.
In September, S. Mahendra Dev, chair of the prime minister's economic advisory council, urged the private sector to "invest in India's growth journey." Earlier, in March 2023, Modi himself called on big business to step up after unveiling a record 10 trillion rupees, about $111 billion at current exchange rates, in government capital expenditure for the coming financial year. Public spending, including by state-owned enterprises, climbed to an at least 12-year high of 8.4 percent of GDP in 2023–24.
Why aren't Indian companies investing? The simple answer is weak demand. Capacity utilisation, a measure of how much firms are using existing production capabilities, is below 75 percent, giving companies little confidence to put up fresh investment.
Real wages are stagnating. After adjusting for inflation, salaried and self-employed Indians earned a lower average monthly income during the year ended March 2024 than they did six years earlier.
That forces Indians to cut back on spending, from everyday items like biscuits to bigger purchases such as motorbikes. Nearly half the workforce still relies on agriculture -- one major area where Modi's reform drive has barely penetrated -- leaving millions in informal, low-paying jobs.
A deep-seated shift is also playing out at India's top business groups. The asset quality crisis that followed a period of industrial splurge up to 2011 saw tycoons stripped of some of the country's largest assets.
A new insolvency law helped find buyers for distressed assets -- ArcelorMittal's takeover of the Ruia family's Essar Steel is one example -- and strengthened creditors' bargaining power with defaulting tycoons. Yet the way many owners were pushed into bankruptcy, with the Reserve Bank of India rather than creditors driving the process, left deep scars.
It created an aversion to debt that India Inc is yet to fully shake off. Net debt at the 200 top public non-financial companies as of September 30 stood at a six-year low of 1.9 times EBITDA, per Axis Capital analysts. Many companies have gone further and pursued "zero-net debt" strategies, preferring to fund growth through existing cash flows.
The priorities of India's wealthy business families are also shifting. Over the next decade, they are expected to transfer $1.5 trillion across generations, according to EY and Julius Baer. Many heirs prefer managing money to building factories; the number of family offices in India surged more than six-fold to around 300 in the six years to 2024.
The trend is so pronounced that billionaire banker Uday Kotak has urged young scions of India's richest families to "create businesses rather than becoming financial investors too early." Take Rishabh Mariwala. The 42-year-old son of Harsh Mariwala, founder of $10 billion consumer goods giant Marico, left the company in 2011 to launch Sharrp Ventures, which has since backed beauty retailer Nykaa and insurance marketplace Policybazaar. Likewise, Gaurav Burman -- part of the fifth generation of the family behind Dabur India, one of India's top fast-moving consumer goods firms -- runs his family's investment programme, managing a wealth pool of over $1 billion. Both still serve as directors in units of their family businesses.
The rise of digital infrastructure and strong stock market returns has made investing in new-age services businesses appear more lucrative and less risky than pursuing capital-intensive industrial projects.
Expanding the factory landscape looks especially daunting when India faces stiff competition from cheap Chinese imports in industries from steel to solar cells.
India Inc's reticence to spend means less bang for every buck in the economy because government spending is less efficient. Incremental capital output ratio -- the number of units of capital spent to produce one unit of output -- currently stands at 4.4, above the up to 3.8 levels during the three years to 2008, a booming era for private investment, says Hitesh Jain, lead analyst at Yes Securities.
As the disconnect between India's fast GDP print and investment trends expands, officials are doubling down on their efforts to spur change.
They had already tried to increase India Inc's industrial competitiveness by offering subsidies linked to production and capital spending in sectors from semiconductors to batteries.
During the past month, Modi's administration launched a revamp of archaic labour laws and withdrew quality control orders on a range of factory inputs from aluminium to plastics. It may eventually scrap licences and outsource routine inspections to third parties, as proposed by a government think tank, per Moneycontrol.
The stakes are high. The more the government invests, the less financial resources it has to expand public healthcare and upgrade its education infrastructure. These worries will come into sharper focus if AI decimates swathes of India's services workforce and the administration also needs to spend on reskilling.
Securing an attractive trade deal with Washington is a prerequisite to any substantial revival of animal spirits. The rupee is weakening, raising the spectre of higher energy import costs and inflation. New Delhi is facing a perfect storm and India Inc offers little cover.
