One of the perplexing aspects of the Indian economy over the past few years has been the lack of investments from the Indian private sector, despite seemingly favourable conditions – access to cheap equity capital with retail SIPs pouring into mutual funds, low corporate leverage, a banking system in reasonable shape to support credit growth, infrastructure bottlenecks resolved in a meaningful way on top of the large domestic market which had underpinned the India growth story for long. The government having done the heavy lifting post Covid by pump priming the economy through stellar growth in public capex has time and again exhorted corporate India to take the baton and do its bit. India’s Chief Economic Advisor, the erudite Mr V Anantha Nageswaran himself wrote in a column last month about how India’s top 500 companies grew profits by 30% and yet investment rates have been anaemic. In a two-part column for the Indian Express last weekend, he shares his take on the underlying reasons. Whilst others have blamed it on one or the other reason, Mr Nageswaran brings nuance in this multi-causal approach to his explanation. “The truth, as usual, lies in the interaction between multiple causes, none of which is individually sufficient.”
First, he brings up the Dutch disease of a large captive market limiting need to build competitiveness “A large captive market insulates producers from the bracing pressure of export competition, which has historically been the driving force behind quality improvement and technological upgrading… Companies that can grow for decades by serving a billion-plus consumers without venturing beyond the Subcontinent have little incentive to invest in the costly, uncertain process of frontier innovation. Why develop a better product when the existing one sells readily?”
Second, he cites the history of our dominant business communities being mercantilist and trading oriented than manufacturing or innovation focused: “Whatever manufacturing instincts and capabilities existed before colonial rule were, in many cases, systematically suppressed. The de-industrialisation documented by economic historians — the destruction of India’s textile industry, among others — was not merely an economic event; it reshaped the orientation of Indian enterprise toward commerce, intermediation, and arbitrage rather than production and innovation.”
Third, something that has been a growing chorus that India financialised way too early in its evolution: “The central argument was that “maximise shareholder value” had been operationalised as “maximise short-term stock price”, with predictable consequences for long-run competitiveness…. India’s corporate sector absorbed the structural features of financialised capitalism before it had fully developed the manufacturing depth and technological capabilities that American and European corporations possessed when they eventually succumbed to the same pressures. Germany, Japan, and South Korea financialised their economies only after generating decades of compounding returns on investment in real productive capability.”
Fourth, he shows how a competitive popular democracy creates uncertainty and pushes up discount rates making investments unviable. “Reconciling the demands of a vast and diverse electorate, multiple levels of government, a hostile neighbourhood, and stakeholders with sharply competing interests makes confident long-run prediction genuinely difficult — not as an intellectual failure, but as a rational response to the environment. Businesses internalise this uncertainty directly: The greater the uncertainty about the conditions under which a long-horizon investment must eventually pay off, the higher the discount rate applied to it. R&D expenditure — which suppresses near-term profitability in exchange for competitive returns that may take a decade to materialise — is precisely the kind of commitment that suffers most when discount rates are high.”
Fifth, he cites the volatile environment of the last 15years: “The financial crisis of 2008, the Eurozone debt crises through 2015, India’s own balance-sheet reckoning as the infrastructure boom unwound, the Covid lockdowns, the Russia-Ukraine war’s supply and energy shocks, and now the Trump administration’s tariff turbulence — each arrived before the last had fully receded. To ask businesses to commit to decade-long R&D programmes in such an environment is to ask them to plant orchards in a forest fire. The rational response to compounding uncertainty is to preserve optionality and defer irreversible commitments. This does not excuse the deficit in Indian R&D, it contextualises it.”
Finally, the inter-generational transition of India’s family-owned businesses where the next generation would rather manage family wealth than roll up their sleeves to take the business forward.
He ends with this clarion call: “India’s ambitions for influence in a multipolar world depend on the technological and productive capabilities of its private sector. Strategic leverage in the 21st century is not purchased with diplomatic skill alone. It is underwritten by industrial capacity, by the ability to offer the world goods and services that others cannot readily replicate, and a position in global value chains that confers genuine bargaining power.
A private sector that captures domestic demand but remains technologically dependent — a consumer of intellectual property rather than a generator of it — is one whose future profitability is under slow but accumulating existential threat. As competitors from East Asia continue to climb the value chain, the space available to Indian businesses that decline to invest in frontier capabilities will narrow. The business community has historically looked to the state to create the conditions for its prosperity, and the state’s obligations in this regard are not trivial. But the capacity for strategic influence is not the state’s to create unilaterally. It depends on decisions taken in corporate boardrooms: About R&D budgets, talent, the willingness to absorb short-term costs in pursuit of long-run competitive advantage. National and shareholder interests converge in the long run. The private sector that fails to recognise this convergence will eventually discover it the hard way.
…The fracturing of the old globalisation, the imperative and the difficulty of supply-chain diversification away from China, the unprecedented window opened by a demographic dividend that is available but will not remain so indefinitely — these are not guarantees of transformation, but they are the conditions that make it possible. The short horizon has served Indian business reasonably well in the long era of low-hanging domestic demand. The next era will belong to those who learn, perhaps not too late, to look further.”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
