Why is corporate investment lagging behind?, Pg10

Key Highlights:

• IIP growth has slowed to a 9-month low of 1.2%, reflecting weak industrial activity.
• Corporate tax cuts (2019) and capex-driven stimulus have not led to private investment revival.
• The private sector GFCF in machinery and IP products grew by only 35% in four years.
• The core problem is a lack of demand, not insufficient profits or low interest rates.
• Classical economic debates reveal that investment follows demand, not the other way around.
• Government capex has limitations due to gestation lags, import intensity, and low employment multipliers.
• Low interest rates alone are insufficient to spur investment without business confidence and demand revival.

Detailed Insights:

• Investment is driven by expected demand for goods produced, not just availability of profits or cheap finance.
• Kalecki’s (economist) argument asserts that investment determines profits, but not all profits lead to investment.
• Luxemburg's critique explains that individual capitalists base investment on perceived demand, not on collective logic.
• Government expenditure is a key exogenous driver to kickstart the investment-profit cycle, especially during downturns.
• Infrastructure-led capex may fail to stimulate demand immediately due to high import content and low labor intensity.
• Monetary easing cannot revive investment if consumer demand remains depressed, as credit uptake depends on expected returns.
• According to Keynes, both credit availability and business confidence must revive for economic recovery to sustain.

Scientific/Technical Concepts Involved

• Gross Fixed Capital Formation (GFCF): Investment in fixed assets by firms, crucial for long-term economic growth.
• Capex (Capital Expenditure): Government spending on long-term infrastructure projects intended to crowd-in private investment.
• Index of Industrial Production (IIP): Measures changes in the volume of production of industrial goods.
• Crowding-in Effect: When public investment leads to increased private sector investment.