Question – The need of the hour is to increase private investment in the economy for India to remain on a high growth trajectory. Also, highlight the steps taken by the government in recent times to reverse the decline in private investment. – 20 August 2021
Answer – Increase private investment in the economy
To achieve the target of becoming a $5 trillion economy by the year 2024-2025, India needs to significantly increase its capital expenditure. However, due to existing financial constraints and rising expenditure on welfare activities, public investment alone is not able to meet the entire investment requirement of the country. Therefore, there is an urgent need to accelerate the flow of private capital into India.
At present, growth is largely driven by consumption and government spending. The other two more powerful engines of growth, namely private investment and exports, are still in a sluggish state. Indeed, if private investment picks up, exports will get a boost along with consumption and government spending.
This can be done by encouraging green sector investment in sectors like aviation, expansion of Public Private Partnership (PPP) in highway projects, modernization of railways etc. Indian start-ups are also increasingly dependent on the private sector for financing and expansion. Private investment is also important for the development of social and human capital. This includes construction of schools, hospitals etc. in PPP mode, flow of private investment for R&D, skill development etc.
In this context, the focus should be on generating ‘impact investments’ that generate financial returns as well as positive and measurable social and environmental impacts. Further, to move ahead in the high growth path, India should follow the path set by countries like US, China etc. and take necessary steps to optimize private capital investment in the country.
However, despite the importance of private investment, private investment has declined over the years, leading to a slowdown in economic growth. India’s growth rate was the fastest during the year 2003-08. The share of private investment in GDP during this period was around 36 per cent. On the contrary, it is currently hovering around 29%. The reason for this are the sudden closure of infrastructure projects, increase in global uncertainties, ongoing tension in India’s domestic financial system, uncertain tax regime, arbitrary laws etc.
The following steps have been taken by the government recently to promote private investment:
- Ease of doing business has been improved to attract private investment. In this context, steps have been taken to facilitate cross-border trade by enabling post-issue audits, integrating trade stakeholders into a single electronic platform, upgrading port infrastructure and increasing electronic submission of documents, etc. The National Investment and Infrastructure Fund have been created with a capital of about Rs. 400 billion to provide investment opportunities in commercially viable projects. This would be a short-term solution in the context of the slowdown in private investment.
- The government has reduced the corporation tax rate from 30 percent to 22 percent. Also, the tax rate for new construction companies has been reduced to 15 percent to attract fresh foreign direct investment.
- In order to improve ease of compliance and ensure uniformity in labor laws, the Central Labor Laws have been framed by the Government in four Codes – The Industrial Relations Code, The Occupational Safety, Health and Working Conditions Code, The Social Security Code have been consolidated.
- PPP is being promoted through the New Education Policy 2020 as well as the National Health Policy. Several investment models have been implemented in the infrastructure sector like Hybrid Annuity Model (HAM), Build Operate Transfer (BOT), Engineering, Procurement and Construction (EBC) etc.
In addition, ‘accelerated labor and land reforms’, predictable and stable taxation regime, facilitation for renegotiation of PPP projects, accelerated implementation of national infrastructure pipeline should be initiated to generate confidence among investors to attract private investment.
