India needs to step up public investment to attract private investments: Working paper by EAC-PM
Corporate profits and investments in India have recovered after the pandemic. Investment recovery has been slower due to limited innovative firms and profitability pressures. Targeted policy support is needed to encourage private sector investments. Intensifying public infrastructure and R&D spending can boost business confidence. Improving contract enforcement will also reduce overall business uncertainty.
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Context
A working paper titled ‘An Investigation Into Corporate Profits and Investment’ released by the analyzes the trend of corporate profits and investments in India from 2008-09 to 2023-24. The paper highlights the need for targeted policy support to address weaknesses in firm-level investments, primarily citing global uncertainty and the threat of rapid technological obsolescence as major deterrents. Crucially, the EAC-PM emphasizes that India must intensify public infrastructure investments to crowd-in private investments and substantially increase research and development (R&D) spending to foster innovation.
UPSC Perspectives
Economic
The core issue highlighted by the paper relates to the investment function in macroeconomics and the phenomenon of crowding in. While increased government borrowing can sometimes lead to crowding out (absorbing available capital and raising interest rates for private firms), strategic capital expenditure (CapEx) in public infrastructure has the opposite effect in India. As the paper notes, public infrastructure investments reduce operational and logistics costs, thereby incentivizing or 'crowding in' private investment. Furthermore, the reluctance of the private sector to invest, despite healthy corporate balance sheets, is attributed to macroeconomic uncertainty and rapid technological changes leading to early obsolescence of capital assets. The suggestion to intensify schemes is aimed at providing direct financial subsidies to manufacturers based on incremental sales, thereby reducing the risk of firm-level investment and boosting domestic manufacturing capacity in strategic sectors.
Governance
A significant governance challenge identified in the paper is the inefficiency of contract enforcement and commercial dispute redressal, which exacerbates the overall business uncertainty. For a robust investment climate, businesses require a predictable and efficient legal framework to resolve disputes quickly. The paper advocates for strengthening Alternative Dispute Resolution (ADR) mechanisms, which include arbitration, mediation, and conciliation. This aligns with recent legislative efforts like the and amendments to the , aimed at reducing the burden on traditional courts and facilitating faster out-of-court settlements. From a UPSC perspective, improving contract enforcement is a critical component of enhancing India's Ease of Doing Business ranking and ensuring a conducive environment for both domestic and foreign direct investment (FDI).
Science & Technology
The paper underscores a critical vulnerability in India's long-term economic strategy: historically low Gross Domestic Expenditure on R&D (GERD). The data highlights that India's R&D spending is hovering around 0.6-0.7% of GDP, which is significantly lower than major economies like China (2.58%) and the US (3.45%). To address the threat of technological obsolescence mentioned earlier, India must foster a robust innovation ecosystem. This requires not just government spending, but significant private sector participation in R&D, which currently lags behind public sector contributions in India. The paper's recommendation to promote industry-academia linkage is crucial for translating theoretical research into commercially viable products. This focus on innovation is essential for moving up the global value chain and transitioning from a low-cost manufacturing hub to a knowledge-based economy, a key theme often explored in GS Paper 3 questions on technology and economic development.