Why Indian capital needs to invest domestically

Basics

• Context: India faces a policy dilemma between:
  • Long-term benefits of global trade and liberalisation.
  • Short-term harms to large sections of the population (low wages, unemployment).
• Issue Highlighted: Current macroeconomic frameworks often prioritize supply and private profits, ignoring the domestic demand needs of the larger population.
• Key Idea: Domestic capital (Indian businesses) must align with public interest to ensure inclusive growth and mitigate external shocks.

Relevance

• GS3: Indian Economy
  • Domestic capital, private investment, macroeconomic demand-supply balance, wage policies, R&D investment.
  • Trade vs domestic demand in a globalized economy.
• GS2: Governance & Policy
  • Role of government-business coordination for national interest.
  • Policy interventions to boost domestic consumption and inclusive growth.

Historical Evolution of Capital

• Pre-liberalisation India
  • Indian businesses grew under protectionist policies.
  • Benefited from inward-looking policies and supernormal profits in domestic markets.
• Post-liberalisation
  • Indian firms leveraged accumulated wealth to expand globally.
  • Some Indian conglomerates became major players in international markets, though such depth is limited to a few giants.
• Current Scenario
  • Global uncertainties: tariffs, distortions, and shrinking external demand threaten Indian exports and aggregate demand.
  • Domestic capital needs reorientation toward internal markets and public-aligned strategies.

Key Economic Concepts

• Mass Markets & Demand Creation
  • Three drivers historically:
    • Creation of wage-labour class.
    • Industrial mass production enhancing productivity.
    • Growth in personal incomes altering demand composition.
  • Modern challenge: Policies often assume demand passively responds to supply; neglecting active stimulation of domestic demand.
• Domestic vs. External Demand
  • Early industrialisation: focus on domestic consumption.
  • Later phases: global markets emphasized.
  • Current turbulence: external demand weak, highlighting the need for domestic consumption-driven growth.

Role of Domestic Capital

1. Enhancing Private Investments
   1. Private sector profits high post-COVID, but investment lags behind.
   2. Public investment has surged: ₹3.4 lakh crore (FY20) → ₹10.2 lakh crore (FY25), CAGR 25%.
   3. Indian capital shows higher inclination toward foreign FDI (CAGR 12.6%) than domestic investment.
   4. Need: Reverse trend by incentivizing domestic capital deployment.
2. Moderate Wage Growth
   1. Corporate profits at 15-year high; wages stagnating.
   2. Contractualisation reduces collective bargaining → slower real wage growth.
   3. Real wages projected to decline (FY26: 6.5% vs FY25: 7%).
   4. Importance: Higher wages → higher domestic demand → inclusive growth.
3. Research & Development (R&D)
   1. India’s gross R&D spending: 0.64% of GDP (low vs global standards).
   2. Private sector contributes ~36% of R&D (much lower than US, China, Japan, Korea where >70%).
   3. Sector focus: Pharmaceuticals, IT, transport, defence, biotech.
   4. Need: Increase long-term innovation investment across diverse sectors.

Challenges Highlighted

• Domestic capital prioritizes profit over national interest.
• Global uncertainties (tariffs, supply chain disruptions) threaten exports and aggregate demand.
• Wage stagnation and low R&D impede inclusive and innovation-driven growth.
• Private sector investments in domestic infrastructure remain subdued despite government incentives.

Policy and Strategic Recommendations

• Unified Approach: Government and domestic capital must cooperate for macroeconomic stability.
• Active Private Investments: Deploy record-high profits into domestic infrastructure, industry, and public-interest projects.
• Inclusive Wage Policies: Ensure wage growth keeps pace with profits to boost consumption.
• Strengthen R&D: Encourage private sector to invest in long-term fundamental research.
• Domestic Demand Focus: Shift attention from purely global export orientation to internal market development.

Broader Implications

• Economic:
  • Domestic capital mobilisation can buffer India against global shocks.
  • Stimulates aggregate demand and strengthens GDP growth.
• Social:
  • Higher wages and employment stability reduce income inequality.
  • Inclusive growth fosters social cohesion.
• Strategic:
  • Self-reliant domestic production reduces dependence on volatile global supply chains.
  • Aligns with “Atmanirbhar Bharat” philosophy in economic policy.