India’s economy is booming. Stock prices are through the roof, among the best performers in the world. Government investment in airports, bridges and roads, and clean energy infrastructure can be seen almost everywhere. India’s total output, or gross domestic product, is expected to grow 6 percent this year — faster than the United States or China.
But there’s a catch: Investment by Indian companies hasn’t kept pace. The money that companies put into the future of their businesses, for things like new machines and factories, is no growth. As a share of the Indian economy, it is shrinking. And as money flies into India’s stock markets, long-term investment from abroad declines.
The green and red lights flash simultaneously. At some point soon, the government will need to cut back on its extraordinary spending, which could weigh on the economy if private sector money is not increased.
No one expects India to stop growing, but an increase of 6 percent is not enough to meet India’s ambitions. Its population, now the largest in the world, is growing. Its government has set a national goal of catching up with China and becoming a developed country by 2047. That kind of leap would require sustained growth closer to 8 or 9 percent a year, most say. economist
The lost investment could also present a challenge for Narendra Modi, the prime minister since 2014, who is committed to making India an easier place for foreign and Indian companies to do business.
Mr. Modi is in campaign mode, facing spring elections and rallying the country to celebrate his victories. Sluggish investing is not something that executives, bankers or foreign diplomats like to discuss, for fear of looking like naysayers. But investors are playing it safe as the economy hints at both strengths and weaknesses.
One point of broad agreement is that India should benefit from China’s slowdown, fueled by a burgeoning property crisis. China’s geopolitical tensions with the West present another opening for India, by prompting foreign companies to move production in China to other countries.
Sriram Viswanathan, an Indian-born managing partner at Celesta, a Silicon Valley venture capital fund, describes investors who “want to fill the vacuum that has been created in the supply chain.”
“That, I think, is the opportunity for India,” he said.
The World Bank applauded India’s commitment to infrastructure spending, which stepped up during the pandemic when the private sector needed a rescue. Since then, the government has doubled down, paying for brick-and-mortar improvements to rickety roads, ports and power supplies that once discouraged business investment.
But the World Bank, whose mission is to boost developing economies, says it is critical that billions in government spending is fueling an explosion of corporate spending. Its economists speak of a “crowd-in effect,” which occurs when, for example, a new port next to a shiny new industrial park attracts companies to build plants and hire workers. worker Last year, the bank said it expected an imminent crowding-in, as it forecast about three years running.
“To accelerate the growth of confidence, public investment is not enough,” Auguste Tano Kouamé, the World Bank’s country director for India, told a news conference in April. “You need deeper reforms for the private sector to invest.”
The lack of confidence helps explain why stock markets are setting records, even as foreign investors pull back from buying into the Indian economy through start-ups and acquisitions.
Stock markets in Mumbai, India’s business capital, are worth nearly $4 trillion, up from $3 trillion last year, making them more valuable than Hong Kong. Small Indian investors are a big part of it, but trading stocks is quick and easy, compared to companies buying and selling. A recent annual average of $40 billion in foreign direct investment has shrunk to $13 billion in the past year.
One reason businesses are watching and waiting to make investments is Mr. Modi’s powerful national government.
On the one hand, business craves stability in political leadership, and India rarely, if ever, has such a well-entrenched leader. He destroyed the main opposition party in three major elections in the Hindi-speaking heartland in December and looks like a shoo-in for re-election this year. And Mr. Modi is vocally pro-business.
His government plays a remarkably interventionist role in managing the economy, in a way that can make it dangerous for companies to place their bets.
In August, the government announced sudden restrictions on the import of laptop computers, to stimulate domestic production. That sent businesses that depended on them into a tailspin, and the proposal was almost abruptly withdrawn. Also in July, the government slapped online betting companies with a retroactive 28 percent tax, costing the $1.5 billion industry overnight.
Businesses close to Mr. Modi and his political circle have done well. The most famous examples are Mukesh Ambani’s Reliance Industries and the Adani Group, conglomerates that reach into many areas of Indian life. Their combined market power has grown enormously in recent years: The principal stocks of each company are worth about six times what they were when Mr. Modi.
Several smaller companies have been the target of high-profile raids by tax enforcement agencies.
“If you’re not the two A’s” — Adani or Ambani — it can be tricky to navigate India’s regulations, said Arvind Subramanian, an economist at Brown University who served under Mr. Modi as chief economic adviser from 2014 to 2018. “Domestic investors feel quite vulnerable,” he added.
The last nine years of the Modi government have improved many things in the business environment for everyone. Essential systems work more efficiently, many forms of corruption have been curbed and digitization of commerce has opened up new arenas for growth.
“What’s really complicated and interesting about this Modi phenomenon is that there’s a lot of hype and bluster and manipulation,” Mr. Subramanian said. “But it’s built on a major breakthrough.”
Still, foreign officials charged with bringing billions in investment capital to India complain that much of the traditional pain of doing business in India remains. The most frequently mentioned is red tape. Too many officials are involved at each level of approval, and it remains very slow in obtaining legal judgments, let alone implementing them.
Another factor holding back long-term investment is an underlying weakness in the “Indian growth story.” The most powerful source of demand, the kind sought by foreign investors and local businesses, is among the wealthiest consumers. Out of a population of 1.4 billion, about 20 million Indians earn well enough to buy European consumer goods, build luxury homes and power the top-tier auto sector.
Much of the rest of the population is struggling with inflation in food and fuel prices. Banks give credit to consumers of the same type, but less to businesses, who fear that most of their customers will tighten their belts in the coming years.
“Right now, there is no evidence that investors are feeling reassured about India,” Mr. Subramanian said.
But he remains hopeful. Annual growth, even less than 6 percent, is nothing. New and improved infrastructure should eventually attract more private investment. And the benefits of consumer wealth, which is unevenly distributed among them, can increase more income over time.
The biggest wild card is whether India can get a large share of global business from China. The highest profile example is Apple, the $3 trillion megacompany, which is slowly moving some of its supply chain away from China. Its expensive iPhone has about 5 percent of the Indian market. But currently about 7 percent of the world’s iPhones are made in India — and JPMorgan Chase estimates that Apple aims to get that to 25 percent by 2025. At that point, all kinds of things become possible for India.
“We should keep our minds open,” Mr. Subramanian said.
