However, despite encouraging private sector investment, the study also warned that while improving balance sheets will enable private sector investment, concerns about cheap imports from countries with excess production capacity may make private sector capital formation “somewhat cautious.”
Overall, the survey projects the Indian economy to grow at 6.5-7 per cent in the current financial year 2024-25.
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Job creation is the role of the private sector and governments
“It is worth emphasizing again that job creation occurs primarily in the private sector,” the study said. “Second, many (but not all) of the issues that affect economic growth, job creation, and productivity, and the responses to them, are the domain of state governments.”
The document further states that in several ways “the action is on the private sector” as in terms of financial performance “the corporate sector is doing better than it has ever done before.”
Based on a sample of over 33,000 companies, the study noted that the data revealed that profit after tax (PAT) in the Indian corporate sector “almost quadrupled” in the three years between FY20 and FY23.
“Furthermore, newspaper headlines are reporting that corporate profits as a percentage of GDP rose to a 15-year high in FY24,” he added. “Employment and compensation growth has not kept pace. However, increasing employment and worker compensation is in the interest of companies.”
Not investing in the right areas
The survey also raised the question of whether the corporate sector had responded favourably to the Union government’s 2019 decision to cut corporate tax rates to boost capital formation. So far, this has not been the case, but it found that the situation was improving recently.
“Private sector gross fixed capital formation (GFCF) in machinery and equipment and intellectual property products grew by only 35 percent cumulatively over the four years to FY23,” the survey noted.
“Meanwhile, GFCF for ‘dwellings, other buildings and structures’ increased by 105%,” he added. “That’s not a healthy mix.”
The report also said that “slower pace of investment” in monitoring and evaluation and intellectual property products will slow India’s efforts to increase manufacturing’s share of overall GDP, and that this will slow the improvement in competitiveness of Indian manufacturing and result in fewer quality, full-time jobs being created than usual, it added.
However, the survey also noted that future global developments in other economies may make India’s private sector even more reluctant to invest more.
“After the strong growth of the past three years, private capital formation may become somewhat cautious due to concerns over cheap imports from countries with excess production capacity,” the report said.
Embrace a traditional lifestyle instead of social media
The study highlighted that India’s working-age population needs skills and good health to gain employment.
“Social media, screen time, sedentary habits and unhealthy diets are a deadly combination that undermines public health and productivity and reduces India’s economic potential,” the report said. “The private sector’s contribution to this mix of harmful habits is significant and shortsighted.”
The report said Indians’ new eating habits are unhealthy and environmentally unsustainable, adding that India’s traditional lifestyles, foods and recipes “have for centuries shown how to live healthily and in harmony with nature and the environment”.
“It makes commercial sense for Indian companies to learn about and embrace them, as India has a global market waiting to be led, not tapped,” the study noted.
Misselling of products in the financial sector is “short-termism”
The survey’s criticism of the corporate sector does not stop there, but also extends to private financial sector companies such as banking and insurance.
While acknowledging that the role of business “has never been more important”, the study said another area of corporate responsibility is to foster and maintain a culture of long-term investment.
“Market practices inspired by thinly leveraged bets disguised as financial innovation in developed countries do not work in developing countries with low per capita incomes,” the study said.
The report noted that along with surging corporate profits, net interest margins at Indian banks have risen to their highest levels in several years, which it said was a “positive thing” as profitable banks would increase lending.
But here, a voice of caution was heard.
“To sustain the upswing, it is important not to forget the lessons learnt from the last financial cycle downturn,” the report said. “The banking industry needs to aim to lengthen the gap between non-performing asset (NPA) cycles. It also needs to resist the temptation to pursue short-term gains at the expense of customers.”
“Misselling of products is far too widespread to be dismissed as the aberrations of a few over-zealous salespeople,” the company added. “The same is true in the insurance industry.”
The survey noted that businesses are benefiting from increased demand generated by rising employment and incomes, while the financial sector is benefiting from redirecting household savings for investment purposes.
“These linkages need to be stronger and more enduring to support investments in infrastructure and the energy transition over the coming decades,” the report said. “Short-termism could weaken these linkages.”
Also read: Modi government claims to have created 780 crore jobs in three years, but there’s a twist: 37% of ‘working’ women are unpaid.
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