Private Investment in Indian Economy
- In a recent meeting with India’s corporate leaders the finance minister raised concerns about sluggish corporate investment, despite the government’s business-friendly stance, including a reduction in the corporate tax.
- The Government of India in the year 2019 had taken this decision of reducing the corporate tax from 30% to 22%.
- Despite this reduction in the tax rates, the private/corporate investment into Indian Economy has not kicked off as expected.
- This is a matter of concern given the fact that private investment accounts for close to 75% of total capital formation in the economy.
- Hence it is necessary for the private investment to flow in consistently for the uninterrupted growth of Indian economy.
Is there a decline in Capital Formation?
- The Government after 2014 had made it clear that state control over the economy will substantially be reduced.
- This was evident in the slogan given by the government, “Minimum Government, Maximum Governance”.
- The private investment/capital formation had peaked in the fiscal year 2011-12, since then it has been consistently declining.
- This has anyway not hindered the public investment but the concern is this will not be sufficient for the economy.
- It is analyzed that statutory obligation such as Fiscal Responsibility and Budget Management Act has stopped the Government in increasing its public expenditure in the country.
What is necessary?
- As the economy has witnessed the decline in private investment, it was required for the public investment to increase.
- Since 1947, every turning point of growth in India was preceded by a significant shift upward of the public investment rate.
- The crowding out effect suggests rising public sector spending drives down private sector spending.
- There are three main reasons for the crowding out effect to take place: economics, social welfare, and infrastructure.
Source The Hindu