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Indian government is worried by private investments not taking off

Indian government is worried by private investments not taking off

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By Parikshit Luthra  Nov 10, 2022 1:59:15 PM IST (Updated)

With a little over two months to Union Budget 2023, further tax breaks are being considered, and the government has reached out to companies for suggestions on making business easier. 

Private investments in India have been slow to take off even as the pandemic wanes. This has got the Narendra Modi administration worried. Sources told CNBC-TV18 that all ministries had been asked to consult the industry and understand why new capacities aren’t being added. The government has reached out to companies making steel, white goods, solar modules, cement and auto components for suggestions on making business easier.

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With a little over two months to the next Union Budget, even further tax breaks are being considered to boost demand and investments. Despite tax cuts and incentives in the last few years, the lack of investments from the private sector has been a source of concern for India. 
“Is it like Hanuman that you don’t believe in your own capacity and strength,” Finance Minister Nirmala Sitharaman said in September. "This is the time for India, and the government is willing to hear the industry and act on what you give us. We can not miss the bus this time and lose momentum," she added.
A year ago, from Reliance Industries to the Adani Group and the Tatas, a host of large corporations in India had plans for capacity expansion. However, as the year draws to a close, the revival in India’s manufacturing sector has been slow.
A big part of the reason is that nearly 30 percent of the production capacity of the country’s factories is still idle, a latest survey showed.
“The future investment outlook also slightly improved as compared to the previous quarter as close to 40 percent of respondents reported plans for capacity additions in the next six months by as much as over 15 percent on an average,” the Federation of Indian Chambers of Commerce and Industry found out at the end of September. 
Just as the supply shocks caused by the pandemic started to ease, Russia’s war on Ukraine sent inflation soaring across the world. An inevitable spike followed in interest rates, making borrowing costlier. 
While the credit growth in India has spiked in the last few months —  the growth in the fortnight ending October 21 was the best since July 2012 — the progress in fresh investments has been slow compared to the Rs 20 lakh crore that companies had declared in the 12 months before the start of the current financial year in April 2022. 
The latest data on the gross fixed capital formation (simply put, investments) is still 31.7 percent less than what it was during the same period in the year before the pandemic. To be clear, private sector investments are up, but as analysts at HSBC Global Research put it in their October report, “it’s mostly replacement capex, not a new cycle.”
India even rolled out a series of production-linked incentive schemes to boost investments in critical sectors like auto components, telecom products, medicines, and drones. Government sources believe it is too soon to judge the efficacy of these schemes. 
Even before the pandemic, in October 2019, Finance Minister Nirmala Sitharaman cut the tax on corporate profits. While less than one in every six companies opted for the new tax regime, last year, the exchequer lost Rs 1.84 lakh crore in the first two years, according to a Parliamentary panel. Not surprisingly, the government is concerned about the slow pace of recovery.
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