When the Centre slashed corporate tax by 10 percentage points in 2019, everyone thought it would unleash the animal spirits of India Inc. Five years on, investments from corporates, large and small, have moved at snail’s pace despite policy sops such as performance-linked incentive, and attractive capital subsidy. 

Ajay Garg, Director and CEO, SMC Global Securities, says the drop in private investments can be largely attributed to poor quarterly earnings and slowing demand due to inflationary pressure. The net profit growth of India Inc was 4 per cent in the July-September 2024 quarter, the lowest in 17 quarters, he said. 

Pointing to CMIE data, he adds that the value of new investment projects announced by companies fell by 29 per cent year-on-year in the first half of this fiscal.

RBI’s recent systemic risk survey found that the private capital expenditure cycle may not revive in the coming year, contrary to the central bank’s own assessment of revival in the second half of this year.

Dip in consumer demand

Despite a healthy balance sheet and cost savings, corporates are holding back on fresh capex due to economic uncertainty. On the other hand, bogged down by high taxes and inflation, consumer demand has been slowing across sectors. 

Moreover, the RBI’s move to curtail unsecured lending is expected to slow down credit flow to consumers and further hit overall demand.

Call for growth

The lack of private investments is hurting more now that the government has also slowed down investments this year. Uday Kotak, founder of Kotak Mahindra Bank, in his New Year’s message, urged India Inc to “Go for growth. Let’s get enterprise and animal spirits firing”.

S&P, in its recent report ‘India’s growing role in the global economy’, said it is surprising that companies are not investing to full potential despite lower corporate tax, strong financial health and PLI schemes.

The private sector, which typically contributes about 37 per cent to the country’s investments, is yet to come forward, the report added.

The global rating agency further stated that India’s net general government debt is elevated at about 86 per cent of GDP and the government may choose to shore up its balance sheet to build fiscal buffers.

It noted that after the pandemic, the country’s recovery has been supported by the government’s infrastructure building activity and household spending on investments. Unfortunately, even government spending has lagged in the first half of this fiscal due to monsoons, preceded by the general elections. 

Earnings slow down

The economy grew by 5.4 per cent in real terms in the September quarter of FY25, lower than RBI’s forecast of 7 per cent. It grew slower than estimated in the June quarter too. 

A major reason for the slowdown in private capex has been the sharp fall in corporate earnings, including a modest 5 per cent earnings growth projected for the top 50 Nifty companies in FY25, according to a Motilal Oswal report. This marks the first instance of single-digit growth in the past five years.

Between FY20 and FY24, corporate earnings had a strong compound annual growth rate of 21 per cent. However, growth has decelerated significantly in the first half of FY25.

Aditi Nayar, chief economist and head-research and outreach, ICRA, says that while external demand has been weak, as reflected in the muted growth in merchandise exports, domestic demand has also been uneven over several quarters, limiting investments in some sectors.

“We expect modest capacity expansion across several sectors such as basic metals, steel, hotels, PVs, telecom, cement, commercial real estate, refining, upstream oil companies, and data centres, over the medium term. This is expected to drive investment activity in the near to medium term,” she adds.

However, the sustenance of domestic demand amid global headwinds would impact capacity utilisation and additions, she explains. Overall, the private sector capex cycle is likely to be measured, rather than exuberant, she adds.

In the June quarter, the value of new investment projects fell by 92 per cent YoY to ₹59,900 crore. However, in the September quarter, the value rose 43 per cent YoY to ₹5.5 lakh crore on the back of government policies and schemes such as PLI, Make in India. In Budget 2025, higher capital allocation to infrastructure may boost private capex.

Lack of support

Even in sectors like steel with high private capex, there is anxiety over the failure to curb cheap imports from China. “The Indian steel industry has been a good example of private sector investments. All the steel companies, including Tata Steel, AMNS, JSPL and JSW, have announced significant capex. Our appeal to the government is to not let it get derailed due to cheap imports and all the taxes,” TV Narendran, Managing Director, Tata Steel, had told businessline in an earlier interview. The animal spirits may need a steely boost to fire up.