Aggressive increase in interest rates is feared to break the investment cycle of companies

When the corona epidemic is almost over, India's economy is recovering well in phases compared to other countries of the world, then it is necessary to increase the investment in various sectors of the country from the government and private sector to support the recovery. To increase investment in the country, the government has announced incentives like Production Linked Incentive (PLI) Scheme, National Infrastructure Pipeline (NIP), National Monetization Pipeline and corporate tax reduction for various sectors in the last few years.

The ratio of investment to GDP which was 34 percent in FY 2013 was 32.50 percent in FY 2022. The government itself is announcing plans for the development of the infrastructure sector and at the same time private companies are also being requested to increase capital expenditure. During the April-July period of the current financial year, the central government's capital expenditure has increased by 63 per cent year-on-year, which is 28 per cent of the provision made for capital expenditure in the current financial year's budget. However, compared to the central government, the cumulative capital expenditure of the states is showing a slow pace. Slow pace of capital expenditure by states is being cited as the reason for the delay in getting approvals from the Centre. NITI Aayog figures show that the aggregate capital expenditure of 21 states of the country is 9 percent lower in this period of the current year as compared to the period of April to July last year.

Talking about the corporate sector, companies are hesitating to spend capital due to the uncertainty prevailing at the global level and at home due to the Russia-Ukraine war after Corona and inflation. Companies are worried that high inflation and interest rate hike will affect demand. It is true that there has been an increase in capital expenditure by companies compared to the Corona era, but this increase is seen to be limited to a few sectors. These sectors mainly include telecom, oil and gas, power and auto sector. Intentions of expansion programs from the private sector are being announced, but they do not appear to be moving at the pace they should. These intentions are also seen only by large companies. Mid-sized companies still seem to have adopted a wait-and-see policy.

During the recession that receded during the Corona period, private companies undertook an exercise to clean up their balance sheets and now with the improvement in demand, companies are gearing up for capital expenditure. Until private companies start spending capital and start their investment cycle, the country's state governments cannot afford to slow down capital spending.

Even so, India's economic growth rate had slowed down even before the Corona period, despite this, the central government has maintained the target of increasing the country's economy to five trillion dollars despite the impact of Corona. Massive investment is needed to bring our economy to five trillion dollars. Most investment in any country is behind infrastructure development. Infrastructural development which can be the engine of economic development of that country.

In the week ending September 9 of the current financial year, credit growth in the country's banking sector was at a multi-year high of 16.20 percent year-on-year. Earlier in November 2013, there was a 16 percent increase in loan withdrawals. In addition to increased credit withdrawals in some sectors, there are also signs of increased capital expenditure from the private sector. After Corona, the capacity utilization of companies has increased with the economic recovery. High capacity utilization means firms are producing more and the increase in production is due to demand growth. In such a situation, the mentality of the companies to undertake the expansion program can increase. Of course, for this it is necessary that the increase in demand is sustained. Growth in consumption can only be possible if aggressiveness in capital expenditure is adopted. Especially by state governments. Any indifference in investments by the government will dampen the enthusiasm of private sector companies for investments.

Government projects which are currently being worked on, are expected to be accelerated so that the projects are completed within time and prevent cost overruns. There is no doubt that Corona has put a strain on the state and central government exchequer, but the government has announced a special program to raise funds for infrastructure projects, which is expected to prove fruitful. It cannot be denied that foreign investors are not attracted behind infrastructure projects like roads, highways, ports. The government may not be indifferent about the policy of the infrastructure sector in India but it is also necessary that the government and private companies do not slack off in raising the necessary funds for it. With interest rates currently on the rise around the world, let's hope the government steps up to provide incentives for capital expenditure.