INDIA’S TOP economist on Saturday criticised the private sector asking it to reflect why it has been reluctant to invest, which in itself might have contributed to demand uncertainty.
Addressing the second annual Isaac Centre for Public Policy Growth Conference organised by Ashoka University, Chief Economic Advisor V Anantha Nageswaran said, “Post Covid, if you look at BSE 500 or NSE 500 companies, corporate profits grew at 30.8% per annum. But still, our overall capital formation rates from the private sector have been disappointing.”
The CEA also warned about a more restrictive external environment and said India needed its own “answer” to Chinese and American laws that secure their supply chains and inward investments. He said global companies will findit “more and more difficult” to move out of China, and warned that India will have to “accept and be willing to work alongside” such a restrictive global environment.
India Inc accumulating profits, not investing in real assets
According to the CEA, companies and second or third generation entrepreneurs “chose to accumulate those cash profits and probably set up family offices elsewhere rather than investing in real assets on the ground”. This, he said, is something that warrants reflection from the private sector because even the regulatory environment has been improving at the margin at the state and Central level.
The CEA said, “Corporates and the second or third generation entrepreneurs chose to accumulate those cash profits and probably set up family offices elsewhere rather than investing in real assets on the ground.” Much of the nation building in developed countries happened not because of public policy alone, but also because the industry acted in national interest and found a fusion between their private interest and national interest, he said.
“So, it’s always easier to point a finger at the government but sometimes the gaze also has to be reversed on the part of the industry,” Nageswaran said.
The current juncture presented the private sector “a good reason to invest”, with the gap between the Indian rupee and Chinese yuan’s real effective exchange rates (REER) closing, the CEA pointed out. This should make it relatively expensive to import from China and relatively inexpensive to export, everything else being equal, allowing the diversification of supply sources away from China.
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The Indian rupee hit a new all-time low of 95.34-per-dollar on Thursday after fresh concerns about the war in West Asia propelled global crude oil prices to a four-year high. The rupee is now down more than 4% since the US and Israel attacked Iran on February 28.
The Free Trade Agreements (FTAs) signed by India also give companies access to foreign markets while also exposing them to more competition. However, it is important Indian companies make use of these FTAs, he said. “One of the problems is the free trade agreement utilisation by India is very poor compared to other countries. So, the industry association and bodies have to do a much better job of talking about them,” Nageswaran said.
Commenting more broadly on the manufacturing sector, the CEA argued it has been able to maintain its share in the country’s Gross Value Added at 17-18% in real terms “in the face of unprecedented competition from China”. “So, it is not therefore a story of failure. It’s probably a story of stability or stagnation, depending on the eye of the beholder.”
Use market access lever to attract companies
“In Hotel California, you said you can check out but not leave. But China is saying you can neither check out nor leave,” Nageswaran said on Saturday, referring to two directives issued in April: Regulations on the Security of Industrial and Supply Chains (Decree No. 834) and Regulations on Countering Foreign Improper Extraterritorial Jurisdiction (Decree No. 835). The two decrees allow foreign companies and executives to be penalised for trying to relocate their supply chains away from China in compliance with foreign directives and measures.
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Further, the decrees also try to counter what it called “improper extraterritorial jurisdiction measures” by a foreign country that endangers China’s national sovereignty, security, and development interests and harms the legitimate rights and interests of Chinese citizens and organisations.
According to the CEA, the decrees look to thwart “any country from trying to facilitate diversification away from China”. “In fact, surprisingly the day this came out, there was a Group of 7+ meeting, I was there. It was about discussing global imbalances and this (Decrees 834 and 835) was not discussed at all,” Nageswaran said.
Given the increasingly restrictive external environment, he said India has to come up with its own institutional or counteracting mechanisms as it didn’t have a “blocking statute” of its own. “And then we have to have a supply chain security framework which should be our answer to Order 834 and we have to have the equivalent of the American CFIUS. And we have to use our market access as an important lever to attract companies,” Nageswaran said.
CFIUS, or the Committee on Foreign Investment in the United States, can review foreign investment transactions and block them if it determines that these deals can compromise US national security. According to analysts, China’s decision earlier this week ordering the unwinding of Facebook parent Meta’s purchase of AI firm Manus for $2 billion is a “mirror image” of CFIUS.
