Economic Notes on Corporate Investment in India

• Corporate investment in India is lagging due to a decrease in demand for goods produced.

• The Index of Industrial Production (IIP) in India has slowed to a nine-month low of 1.2%.

• Investment is dependent on the revival in process, not the sake of investment.

• The RBI’s attempts to finance investment through lower interest rates or liquidity are seen as putting the cart before the horse.

• The 2024-25 Economic Survey expressed dismay at the corporate sector’s financial performance, with hiring and compensation growth hardly keeping up with it.

• The private sector’s gross factor factor (GFCF) in machinery and equipment and intellectual property products has grown only by 35% in the four years to FY23.

• The debate between Rosa Luxemburg and Tugan Baranovsky on what determines investment in a capitalist economy is discussed.

• The equation does not tell us whether profits cause investment or investment causes profits.

• Marxist economist Kalecki questioned which one can capitalists decide/control: investment determines profits in a given period, not the other way round.

• Baranovsky argued that there is no limit to investment provided a certain proportion is maintained between consumption and investment sectors.

• An economy where workers’ consumption is suppressed may still flourish with higher investment and higher profits simply by the decision of capitalists to accumulate.

Investment and Profits in Capitalism

• Luxemburg argues that investment leads to profits, but it doesn’t necessarily imply that any investment will be undertaken.

• Investment decisions under capitalism are made by individual firms/capitalists, driven by their own assessment of demand for the products they produce.

• In a downturn, individual capitalists would be foolish to invest because adding capacity would entail more losses.

• Collectively planned investment is an anathema to capitalism.

• Investment depends on the demand for the goods it produces and cannot have a life of its own.

• Finance, either internal (retained profits) or external (debt, public offerings), is another factor behind investment.

Lagging Corporate Investment

• The government assumed that with tax cuts and higher post-tax profits, investment would pick up.

• However, Luxemburg argued that investment will follow if there is a revival in process; it cannot lead the revival under conditions of slowdown.

• Investment requires exogenous stimuli from government expenditure and external markets.

• Government expenditure is the most important lever to kickstart the investment cycle with a slowing global demand.

• The idea behind capex spending is that it would crowd-in private investment, but this may be delayed due to gestation lags, import component of spending, and labour intensity of projects.

• The RBI’s attempt to finance investment through lower interest rates or liquidity is like putting the cart before the horse.

• Recovery requires the revival of both speculative confidence and the state of credit.