What drives corporate investment?, Pg8

Key Highlights:

• Corporate investment in India, as a share of GDP, has been declining, particularly since demonetisation in 2016.
• The current share of corporate investment has not returned to levels seen during the Global Financial Crisis (GFC).
• Key determinants of investment include expected profitability, business confidence (termed 'animal spirits' by John Maynard Keynes), and the cost of credit.
• Firm size plays a crucial role, with smaller firms often constrained by credit availability and larger firms by market demand.
• Despite a corporate tax cut in 2019 and a low-interest-rate regime by the RBI, corporate investment has not significantly revived.

Corporate Investment.jpg

Detailed Insights:

• Corporate investment experienced a significant surge from 2004, peaking before the Global Financial Crisis (GFC), and then revived until demonetisation.
• Demonetisation is identified as a self-inflicted shock that reduced immediate profitability and raised doubts about future policy stability.
• The COVID-19 pandemic in 2020-21 was an external shock, but the decline in investment had commenced earlier.
• John Maynard Keynes's concept of 'animal spirits' underscores the importance of business confidence in influencing investment decisions.
• Michal Kalecki's 'principle of increasing risk' explains how access to capital favors larger firms, creating an inherent bias against smaller capitalists.
• Smaller firms typically face higher interest costs and credit constraints, whereas larger firms are primarily limited by the overall market size.
• Policy measures like interest rate reductions or the corporate tax cut from 30% to 22% in 2019 have not effectively stimulated investment due to low profitability expectations.
• The article suggests that increased government expenditure, acting as an autonomous stimulus, is necessary to boost demand and improve profitability expectations across all firm sizes.

Key Concepts Involved:

• Demonetisation: The act of stripping a currency unit of its status as legal tender, as seen in India in 2016.
• Global Financial Crisis (GFC): A severe worldwide economic crisis that occurred in 2008-2009, originating from the U.S. subprime mortgage market.
• Animal Spirits: A term by John Maynard Keynes describing the non-rational instincts and emotions that drive human economic behavior, especially investment.
• Principle of Increasing Risk: A concept by Michal Kalecki stating that a firm's investment is limited by its own capital, as borrowing more increases financial risk and cost.
• MSMEs: Micro, Small, and Medium Enterprises, which are vital for employment generation and economic growth.
• Fiscal Hawk: An individual or group advocating for strict control over government spending and a balanced budget.