Sanjaya Baru | Budget 2023: Capital strike subdues the ‘animal spirits’

“I would like now to see private investors and private industry in India coming forward with that so-called animal spirits to show that it is possible for India to be one of the fastest-growing economies.” So implored Union finance minister Nirmala Sitharaman, addressing a gathering of business leaders earlier this month. The “animal spirits” of entrepreneurs, observed the father of modern macroeconomics, John Maynard Keynes, are the “spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities”.

Keynes made a distinction between entrepreneurs and what he termed as “professional investors”. It is entrepreneurs who are the real risk takers, who take bets and charge forth. Professional investors are characterised by managerial inertia and boardroom wisdom. Indian industrial, manufacturing sector and even services sector growth rose between 1991 and 2011 driven to a considerable extent by entrepreneurial energy and initiative. Company names not heard of in the 1980s were among the most successful in the early 2000s.

That corporate energy began to wind down after 2012 and went into slumber over the past six years. Consequently, the share of gross fixed capital formation in the private sector as a percentage of gross domestic product went down from close to 31 per cent in 2011 to 22 per cent in the pre-Covid year 2020. Hoping to stimulate private investment, former finance minister Arun Jaitley reduced corporate tax down to 15 per cent.

This did not help. While the corporate sector continued to record high profits and became cash rich, it was just not investing in new projects.

Faced with a stagnation in demand and growing concerns about the harassment of business by the government’s various investigative agencies, and with ruling political parties at the Centre and in states making humongous demands for electoral funding, the appetite for new investment remained subdued.

Recognising that private investment was not adequately forthcoming, Ms Sitharaman declared in her 2022 Budget speech that she would now rely on the “virtuous cycle” of kickstarting private investment by undertaking public capital investment that she hoped would help “crowd-in private investment”. At this stage, declared Ms Sitharaman, “private investments seem to require that support to rise to their potential and to the needs of the economy. Public investment must continue to take the lead and pump-prime the private investment and demand in 2022-23”. Ms Sitharaman has certainly delivered on the promise of raising public investment. Yet, private investment either of the entrepreneurial sort or of professional investors, has not been adequately forthcoming. In part, this is due to demand remaining subdued due to a variety of reasons, including the overall social and policy environment at home and the environment of uncertainty globally. Few expect a turnaround in either the domestic or global environment over the next year.

Long-term expectations, as Keynes reminded us, is among the factors that “determines the prospective yield of an asset… Expectations of prospective yield can in part rely on existing facts but must also rely on future events which can only be forecasted with more or less confidence” because of the “extreme precariousness of the basis of knowledge on which our estimates have to be made”. Expectations about the future remain subdued whatever the hype and hoopla that the government and various entities have tried to generate.

Here is an assignment for a smart student of economics. Add up the investment plans announced at various state-level business summits since 2012. Inspired by the example of Vibrant Gujarat, almost every major state has since hosted “business summits” over the past decade. At each summit, leaders of big business occupy centre-stage and make bombastic speeches promising to invest lakhs of crores of capital in the state. The media assiduously reports all the good news and generate expectations of a new dawn.

Once the inaugural event is over and the VIPs are gone, these summits quickly end up leaving lots of garbage behind for the unwashed to clean up. Incidentally, while these summits are supposedly hosted by major business chambers, they are all funded by the government -- both the Centre and the states. Public money is, therefore, used to showcase the private sector’s supposed enthusiasm to invest in the state.

I tried a back of the envelope calculation based on newspaper reports of intentions to invest at such summits to see how much has been promised. If the corporate sector had delivered on its promises, there ought to have been new investment of over a trillion dollars over the past decade. But, as we know, this has not been the case. A couple of business entities may have delivered, but few have followed the leader. What we continue to witness is a sort of “capital strike”. If a labour strike entails production down, a capital strike entails investment down.

So, if Ms Sitharaman wants private investors and the corporate sector to heed her call to demonstrate their “so-called animal spirits” and show that “it is possible for India to be one of the fastest-growing economies”, then she and the government as a whole will have to find ways to end this “capital strike”. This requires optimism about future growth and demand, not based on political exhortations and grandiose scenario painting but on what Keynes termed as the “outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities”.

It has become a habit for most governments to make the annual Budget speech a statement of past achievements and grand promises. Rather, it would be helpful to investors if the Budget speech this year offered a realistic plan for the path forward from the three-year (2020-23) average growth rate of real GDP of just around 3.0 per cent to at least a 6.0 per cent average in the next two. The “Rising India” narrative, as I have often written before, was based on the observed trajectory of 7.5 per cent growth during 2000-2010, following the 5.5 per cent annual average growth during 1980-2000 that followed 3.5 per cent in 1950-1980. Today, only the narrative is back, but without the numbers to defend it.