India’s wait for a revival in private investment has developed the air of a drama by Samuel Beckett

Last week, chief economic advisor V. Anantha Nageswaran said that profits for the 500 largest publicly traded companies had grown by over 30% a year since the pandemic, “but still, our overall capital formation rates from the private sector have been disappointing.”

Nageswaran is not the only one complaining. India’s finance minister Nirmala Sitharaman publicly wonders every few months why corporations seem so unwilling to invest. She has repeatedly pointed out that she has lowered taxes, cleaned up banks’ balance sheets, tried to support consumer demand, spent public money on infrastructure—yet is puzzled why companies haven’t responded.

The government is right to be worried. After all, if companies don’t invest, the economy won’t expand.

It has correctly identified the biggest roadblock to higher growth — low investment—if not why it exists. The numbers they’re looking at aren’t a state secret: Back in the boom years more than a decade ago, capital expenditure was over 40% of GDP. It’s down by about 10 percentage points on average since then.

And that’s including ever-increasing amounts of public investment. New Delhi, lacking confidence in the corporate world’s appetite for expansion, has felt it necessary to pick up the slack. Consequently, total investment in productive assets dropped by 2023-24 to a decadal low of a third. Growth in recent quarters has been high—around 8%. But that’s been largely thanks to big tax cuts for consumers as well as moderate inflation; both have run out of steam.

But the government still hasn’t figured out why the private sector isn’t following its instructions to lift capital expenditure.

Nageswaran’s own explanation has a certain satisfying Gen Z-friendly punch: He seems to blame nepo babies. The problem is second- and third-generation owners who “chose to accumulate those cash profits and probably set up family offices elsewhere rather than investing in real assets on the ground.”

He is reflecting the frustration that many in government feel. Sitharaman also accused India Inc last year of “sitting on passive investible funds” rather than trying to expand.

Certainly, the closely held, family-run character of many of the country’s largest companies means that they tend to prioritize safety rather than experimentation.

In many other, more dynamic economies, family businesses worry about going, as an old saying has it, from shirtsleeves back to shirtsleeves in three generations. The grandparent might have climbed out of the sleeves-rolled-up, struggling middle class and built a corporate empire, but the grandchild might well take the family back down again.

India’s far more closed, less entrepreneurial corporate culture might well mean that the younger generation isn’t threatened enough to lose the company—and will find it easy enough to delegate the unexciting task of management while setting up a family office in Dubai or somewhere.

Taking on the social basis of India Inc, dominated as it is by clan, caste and family links, isn’t something that any government feels comfortable doing. But at the very least, they shouldn’t make business feel more threatened, and thus risk averse.

Yet that’s what has been happening. The real reason India’s richest don’t want to invest domestically—and, possibly, why they take some of their cash abroad—is because they estimate local political risk as being too high. They might be hit by a hefty and unpredictable tax bill or fall afoul of mercurial politicians. If they earn money in India, their first instinct is to try and diversify geographically, so they escape New Delhi’s control as much as they can.

Their skittishness has infected many foreign companies as well. In January, foreign direct investment in India was $5.67 billion, but $4.92 billion worth of profits were repatriated. Indian companies’ outward investment was $2.14 billion. After all, if people who grew rich in India aren’t happy re-investing there, why would multinationals?

Policymakers keep asking why companies aren’t expanding their domestic operations because they don’t like the answers they’re getting. Tax cuts and fiscal stimulus are great and nobody ever turns them down. But what corporate India really wants is administrative, judicial and political predictability. They want freedom from fear. They don’t want to feel that their liberties and livelihoods are dependent on the whims of New Delhi.

Waiting for that freedom, capital has gone on strike. To lure it back, the government would best consider finally granting them some autonomy. ©Bloomberg

The author is a Bloomberg Opinion columnist.