Why India Inc. is not taking a Hanuman leap


  • In a meeting held with the country’s corporate leaders recently, Finance Minister drew attention to an important aspect of the economy today. She rightly flagged concerns about sluggish corporate investment, despite the government’s business-friendly stance, including a reduction in the corporate tax. The reduction, effected in 2019, lowered the rate for existing companies to 22% from 30% and for new manufacturing companies to 15% from 25%. However, the corporate investment rate, i.e., investment as a share of the national income, has barely budged. Ms. Sitharaman challenged corporate leaders to invest.
  • Private firms are driven by profit expectations. Managers are averse to risk, and unlikely to rush to invest based on exhortation from a Minister if they do not anticipate enough profits. Private investment accounts for close to 75% of total capital formation in the economy; its revival therefore is essential for sustained growth of the economy.
Capital formation is a term used to describe a country’s net capital accumulation over an accounting period. The term refers to capital goods additions such as equipment, tools, transportation assets, and electricity.Countries require capital goods to replace older ones used in the production of goods and services. Production falls if a country is unable to replace capital goods as they reach the end of their useful lives. In general, the higher an economy’s capital formation, the faster it can grow its aggregate income.

Decline of private capital formation

  • The NDA government’s first pronouncements in 2014 had conveyed that it desired a shift away from a state-driven model of economic development. If this was to be, the private sector would take the lead in driving the economy. The government aimed to improve the ease of doing business in India.
  • As private capital formation last peaked in 2011–12, its decline is something that the present government inherited. However, it has had no success in turning it around. Though it has not allowed public investment to slip, that has not been enough under the circumstances. Either ideological predilection regarding the size of the government or the straitjacket imposed by the Fiscal Responsibility and Budget Management Act (FRBMA) have held back the government from expanding it.
  • When Mr. Modi arrived at the Centre, the upsurge in public investment had long since ended and agricultural growth had become erratic. Finally, with the global financial crisis and the slowing of the world economy, export growth declined. These added up to a slowing of the exogenous drivers of demand, and private investors could not but have seen that the situation was not likely to turn positive soon.
  • Based on the situation in 2014, India’s investors would have been fully rational in anticipating a not-so-rosy future for the economy unless some exogenous factors were to turn favourable, or the government were to act decisively to energise the situation through public investment. They would have seen that demonetisation, with the attendant digitisation, and the roll out of the GST could not have done much for the growth of demand.

Stepping up public investment

  • The one lever that the government could have pulled as it watched private investment decline was to step up public investment. Since 1947, every turning point of growth in India was preceded by a significant shift upward of the public investment rate. It suggests that crowding in, rather than crowding out, characterises the relationship between public and private capital formation in India.
Crowding-in is a phenomenon that occurs when higher government spending leads to an increase in economic growth and therefore encourages firms to invest due to the presence of more profitable investment opportunities.

Impact of COVID-19:

  • While the government has for long nursed an aversion to the government playing a role in capital formation, the experience during the pandemic seems to have brought about a change of mind. The Union Budget of 2022 was defined by a historic increase in the allocation for capital spending. This could have a positive effect on private investment, but past experience suggests that it could take time to play out. So, the expansion in public investment may have to be sustained for sufficiently long.
  • Even the fiscally conservative International Monetary Fund has suggested that public investment can play the role of an engine of growth for the developing economies. The sustained growth needed to kindle private investment may require that the current public investment thrust be sustained for at least half a decade.

Way forward: accelerating private investment:

  • However, two aspects would remain crucial even if the government were to find the will to maintain its current pace. One, it is important to choose the right projects. The investment must be focused on productivity-enhancing infrastructure. Here, some tied transfer of funds to the States would be desirable, as they are better placed to identify such investment.
  • Two, inflation can derail a high public investment programme due to the disaffection it generates. Its control would require a step-up in the growth of agricultural produce other than the superior cereals. In fact, this should be seen as an opportunity to end India’s import dependence on edible oils and the persisting shortfall in the supply of vegetables. Only a supply-side thrust can permanently end food inflation.


  • Though this government may have inherited the sluggish private investment, it must reflect upon whether its own actions may have adversely affected the investment climate.

The coalition of the world


  • The League of Nations, set up in 1920, was the first intergovernmental organisation with the aim to promote international cooperation and outlived its utility with World War II.

United Nations (UN) :

The revamped League, now better known as United Nations, claims to be the one place where all the world’s nations can discuss common problems and find shared solutions that benefit all of humanity. Now, 75 years later, rising conflict situations suggest it is time to go back to first principles of the UN Charter.

UN Charter :

The Charter of the United Nations (UN) is the foundational treaty of the UN, an intergovernmental organization. It establishes the purposes, governing structure, and overall framework of the UN system, including its six principal organs:

  • the Secretariat
  • the General Assembly (UNGA)
  • the Security Council (UNSC)
  • the Economic and Social Council (UN-ECOSOC)
  • the International Court of Justice (ICJ)
  • the Trusteeship Council

The UN Charter mandates the UN and its member states to maintain international peace and security, uphold international law, achieve “higher standards of living” for their citizens, address “economic, social, health, and related problems”, and promote “universal respect for, and observance of, human rights and fundamental freedoms for all without distinction as to race, sex, language, or religion”. As a charter and constituent treaty, its rules and obligations are binding on all members and supersede those of other treaties.

UN at a turning point

First, multilateralism is under challenge even by its proponent, with the United States opting for partnerships, with the most important areas being the worst affected. The G7 Summit, held in June, endorsed the goals of a cooperative international Climate Club to accelerate climate action outside the UN.

The dispute settlement mechanism of the WTO without the quorum of its members has rendered the institution dysfunctional. Despite the G7 having accepted the need for transfer of funds at Rio in 1992, because of their role in creating the climate crisis, the promise made in 2009 to provide at least $100 billion per year in climate finance remains unfulfilled.

Second, China has opted for rival set of multilateral institutions. China’s Belt and Road Initiative (BRI) seeks to achieve policy, infrastructure, trade, financial, and people-to-people connectivity by building a new platform for international cooperation to create “new drivers of shared development”, and covers half the world population with one-third the GDP and investment of $930 billion.

China’s Global Development Initiative (GDI) 2021 and linked Global Security Initiative (GSI) 2022, is developing a conceptual frame responding to an urbanising world, i.e. digital governance and non-traditional security, which the international system has not covered.

Third, more significant than the clash of institutions reflecting the deepening divide between the Atlantic powers and the Russia-China combine is the diffusion of wealth, technology and power. The ‘rest’, despite threats, are now capable of not taking sides and are looking for leadership within the United Nations, for what the UNSG characterised as “coalition of the world”.

Way forward: Role of India:

First, India’s Presidency of the Group of 20, UN Security Council (UNSC) in 2022, and the Shanghai Cooperation Organisation (SCO) in 2023 when major powers are not even talking to each other and India alone, now the fifth largest economy, is interacting with each of them, presents a historic opportunity.

Strategists in major powers see the world in binary terms around rules. In a multipolar world, the question is the kind of rules needed for human wellbeing and whether principles would serve the purpose better.

Second, the time is ripe for a ‘big idea’ that both keeps away from the current multilateral focus on global rules, amount of aid and inviolability of IPR’s as well as recognises a role for competing institutions as countries can now secure the best terms themselves without bargaining.

Third, just as the ‘Rio principles’ continue to guide climate change, vasudhaiva kutumbakam, or ‘world as one family’, focusing on comparable levels of wellbeing can be the core of a set of universal socio-economic principles for a dialogue between the states.

Fourth, to the current global consensus around equitable sustainable development, Prime Minister Narendra Modi has added a clearer societal purpose to flesh out a universal civilisational principle. He emphasised ‘Lifestyle for Environment’ seeing climate change as a societal process and combating it devoid of trade-offs characteristic of the Climate Treaty. He has also offered India’s payments and linked digital ID technology without IPR restrictions.

Fifth, redefining ‘common concerns’ in terms of felt needs of the majority rather than interests and concerns of the powerful will shift the focus of a much slimmed down United Nations squarely to human wellbeing, and not as an add-on.


  • India’s Presidential statement could introduce ‘vasudhaiva kutumbakam’ in the UNSC in December. The SCO Summit will precede the G20 Summit and acceptance of overarching principles will support acceptance by the wider G20.


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