Post-Pandemic Economic Analysis in India
Corporate Profitability vs. Investment
The recent working paper by the Economic Advisory Council to the Prime Minister (EAC-PM) identifies a key issue in India’s recovery post-pandemic: corporate profits have rebounded more rapidly than investments.
- Profits before interest and tax (PBIT) grew by 21.4% in 2023-24, but gross fixed assets only increased by 6.1%, creating a gap of 15.3 percentage points.
- The recovery in investment is still weak despite some improvement from the pandemic shock.
The investment decision hinges on anticipated returns from new capital rather than profits from existing assets. Declining marginal profitability is exerting downward pressure on investment.
Factors Affecting Investment
- Increased competition from domestic firms and imports.
- Global industrial overcapacity.
- Faster technological obsolescence.
Policy Recommendations
India needs policies that make productive investment more profitable, not just policies that encourage spending.
- The NITI Aayog-Crisil road map outlines a strategy for transforming India into a global manufacturing hub by focusing on 12 sectors with potential for global leadership.
- Key recommendations include enhancing scale, infrastructure, technology, skills, domestic value addition, and integration with global value chains.
Manufacturing Constraints and Solutions
- India’s manufacturing share has stagnated at 16-18% of gross value added for two decades.
- Constraints include logistics and infrastructure gaps, fragmented MSMEs, and limited economies of scale.
Cluster-based manufacturing and integrated industrial parks can help overcome these challenges by reducing costs and facilitating supplier linkages.
Tariff Rationalisation
High duties on imported intermediates raise domestic production costs and act as an implicit tax on exports. Lower tariffs can reduce input costs and enhance export competitiveness.
Global Value Chains
India’s share in global manufacturing value added increased from 1.5% in 1995 to 3.2% in 2023, while China’s share rose from 5% to nearly 32%. Access to export markets, reliable suppliers, and technology is crucial.
Technology Capability
The absence of highly innovative "superstar" firms hinders investment recovery. India’s gross expenditure on R&D is only 0.6-0.7% of GDP, compared to 3.45% in the US and 2.58% in China.
The focus should be on achieving sustained commercial returns rather than indefinite capex subsidies.
