{"id":119880,"date":"2026-08-19T11:00:39","date_gmt":"2026-08-19T05:30:39","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=119880"},"modified":"2026-08-19T11:00:39","modified_gmt":"2026-08-19T05:30:39","slug":"corporate-investment-in-india","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/corporate-investment-in-india\/","title":{"rendered":"Corporate Investment in India &#8211; Profitability, Demand and Cost of Credit"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><strong>Corporate Investment Latest News<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A recent analysis examines the prolonged decline in <\/span><b>corporate investment as a share of GDP in India<\/b><span style=\"font-weight: 400;\"> and argues that weak demand expectations, profitability and differences in access to credit across firms are more important than simply reducing interest rates or corporate taxes.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Corporate Investment in India<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Corporate investment refers to expenditure by businesses on productive assets such as factories, machinery, equipment, technology and other forms of fixed capital.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It is an important driver of economic growth because it expands productive capacity, creates employment and can improve productivity.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A recently conducted study examines corporate investment through the lens of manufacturing firms and asks why private investment has remained subdued despite measures such as corporate tax cuts and a relatively low-interest-rate environment.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Trend in Corporate Investment<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">According to the analysis, corporate investment as a share of GDP experienced a major increase in <\/span><b>2004<\/b><span style=\"font-weight: 400;\">, rising from <\/span><b>6.5% to 10.3%<\/b><span style=\"font-weight: 400;\"> in a single year. It subsequently increased during India&#8217;s high-growth period.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Investment declined during the Global Financial Crisis (GFC) but later began recovering. This revival continued until demonetisation in 2016, after which corporate investment entered a prolonged decline.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The study highlights that the decline after demonetisation is particularly significant because, unlike the Global Financial Crisis, which originated from an external global shock, demonetisation was a domestic policy shock.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The analysis also notes that investment had already begun declining before the COVID-19 pandemic, suggesting that the pandemic alone cannot explain the prolonged weakness.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>What Determines Corporate Investment?<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li><span style=\"font-weight: 400;\">There are <\/span><b>three major factors<\/b><span style=\"font-weight: 400;\"> influencing a firm&#8217;s decision to invest in a new factory or other productive assets.<\/span><\/li>\n<li><b>Expected Profitability<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">A firm will invest when it expects the additional productive capacity to generate sufficient profits.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Economies of scale mean that larger factories and equipment can often generate higher profit rates than smaller investments. However, every firm also faces a limit to how much it can sell.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Once productive capacity exceeds potential demand, additional investment may remain underutilised.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Therefore, investment depends not simply on whether a firm can build a factory, but on whether it expects sufficient <\/span><b>future demand and profitability<\/b><span style=\"font-weight: 400;\"> from that factory.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Confidence in Future Returns<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Investment involves a long time horizon. A factory may operate for decades, meaning firms must form expectations about future demand, profits and government policy.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The study uses <\/span><b>Keynes&#8217;s concept of<\/b> <b>&#8220;animal spirits&#8221;<\/b><span style=\"font-weight: 400;\"> to describe this confidence.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">When businesses are optimistic, expected profitability increases and firms are more willing to invest. When businesses become pessimistic, their expected profitability falls, reducing investment.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The authors argue that demonetisation affected investment not only by reducing immediate profitability but also by weakening confidence in future economic and policy conditions.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Cost of Credit<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Interest rates matter in two ways.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">First, a firm compares the expected profitability of an investment with the return it could obtain by simply holding interest-bearing assets.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Investment therefore becomes attractive when expected profitability exceeds the relevant market interest rate.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Second, firms that need to borrow to finance investment face a direct cost of credit.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">However, the importance of interest rates differs according to firm size.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Why Firm Size Matters<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li><span style=\"font-weight: 400;\">The analysis distinguishes between <\/span><b>small, medium and large firms<\/b><span style=\"font-weight: 400;\"> because their investment constraints are different.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The authors compiled a balanced panel dataset of listed manufacturing firms between 2000 and 2024 using the Prowess database and categorised firms into three size groups.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The analysis finds a clear asymmetry:<\/span>\n<ul>\n<li><b>Smaller firms:<\/b><span style=\"font-weight: 400;\"> Lower profitability and higher interest costs.\u00a0<\/span><\/li>\n<li><b>Larger firms:<\/b><span style=\"font-weight: 400;\"> Higher profitability and lower interest costs.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This difference has important implications for investment policy.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Smaller Firms Are More Credit-Constrained<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Smaller firms generally have less internal capital. Consequently, they need to depend more heavily on external borrowing to finance investment.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">As borrowing increases, the cost of credit can rise because lenders perceive greater risk. This reflects what economist <\/span><b>Michal Kalecki<\/b><span style=\"font-weight: 400;\"> described through the <\/span><b>principle of increasing risk<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Therefore, even when a small and large firm have access to similar technology, the smaller firm may face a significantly higher financing constraint.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Large Firms Are More Demand-Constrained<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Large firms typically possess greater internal capital and therefore face less severe financing constraints.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">However, they may already have sufficient productive capacity relative to the market they can serve. Their investment is therefore constrained more by <\/span><b>demand and expected sales<\/b><span style=\"font-weight: 400;\"> than by the availability of credit.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This produces an important asymmetry:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Small firms are more likely to be constrained by finance, while large firms are more likely to be constrained by demand.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Why Lower Interest Rates May Not Be Enough<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The study argues that this distinction helps explain why conventional cost-side measures have not produced a strong investment response.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India reduced the corporate tax rate from <\/span><b>30% to 22% in 2018<\/b><span style=\"font-weight: 400;\">, while the Reserve Bank of India also maintained a relatively low-interest-rate environment for a period.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Yet corporate investment did not experience a corresponding revival.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The study argues that reducing interest rates may not substantially increase investment among smaller firms because their fundamental constraint may be <\/span><b>access to credit and insufficient internal capital<\/b><span style=\"font-weight: 400;\">, rather than simply the headline interest rate.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">For large firms, lower interest rates may have an even smaller effect because these firms are primarily constrained by <\/span><b>market demand rather than financing costs<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Similarly, tax cuts may increase post-tax profitability but may not induce investment if firms do not expect sufficient demand for additional output.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>What Could Revive Corporate Investment?<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The analysis argues that policies should focus on shifting the <\/span><b>profitability curve outward<\/b><span style=\"font-weight: 400;\"> rather than relying primarily on cost-side interventions.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The proposed mechanism is stronger <\/span><b>autonomous government expenditure<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Government expenditure can create additional demand for goods and services. Higher demand can improve firms&#8217; expectations regarding future sales and profitability, encouraging both small and large firms to invest.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Such expenditure can therefore influence investment through the <\/span><b>demand channel<\/b><span style=\"font-weight: 400;\">, rather than merely reducing the cost of financing.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Conclusion<\/strong><\/h2>\n<ul>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The prolonged weakness of corporate investment in India cannot be explained by interest rates alone.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The analysis highlights a fundamental difference between firms: <\/span><b>smaller firms face greater financing constraints, while larger firms are more constrained by demand<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This means that policies such as lower interest rates or corporate tax cuts may have limited effects when businesses lack confidence in future demand.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The authors therefore argue that stronger demand creation through government expenditure could play a more important role in reviving private investment and generating employment.<\/span><\/li>\n<\/ul>\n<p><b>Source:<\/b> <strong><a href=\"https:\/\/www.pressreader.com\/india\/the-hindu-kochi-9ww8\/20260819\/282273852201411?srsltid=AfmBOoqtFEJ0_46eMLWuIyZ8F1a-t3UzFes6f80mQdqucpXeoaq7NmS-\" target=\"_blank\" rel=\"nofollow noopener\">TH<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>India&#8217;s corporate investment as a share of GDP has declined sharply since demonetisation.<\/p>\n","protected":false},"author":21,"featured_media":119886,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[9631,60,22,59],"class_list":["post-119880","post","type-post","status-publish","format-standard","has-post-thumbnail","category-upsc-mains-current-affairs","tag-corporate-investment","tag-mains-articles","tag-upsc-current-affairs","tag-upsc-mains-current-affairs-tag","no-featured-image-padding"],"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/119880","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/21"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=119880"}],"version-history":[{"count":4,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/119880\/revisions"}],"predecessor-version":[{"id":119895,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/119880\/revisions\/119895"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/119886"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=119880"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=119880"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=119880"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}