Dear Express Reader

At the heart of India’s ongoing economic travails is the question: Why are the big cash-rich corporates not investing in the country? Why are companies taking money out of the country rather than investing it here? Why are animal spirits caged?

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The government can claim, and perhaps rightly so, to have taken several steps to facilitate investments. Yet private corporate investments remain considerably lower than the peak seen in the mid 2000s. India Inc appears to be more keen to deploy its funds in financial assets rather than utilise them in building physical assets such as factories. Several explanations ranging from subdued domestic demand to global uncertainty have been put forth. But does the answer lie more in the realm of the political economy? Of how the political power structures in the country impact investments?

Centralisation of political power has been unmistakable post-2014. This has been accompanied by a push towards greater fiscal centralisation and reconfiguration of federal structures. Attempts to restrict the powers of states, and, as a consequence, regional parties, can, for instance, be seen in legislation such as the MMDR Amendment Act, 2026. Growing political and fiscal centralisation has been accompanied by increasing market concentration with the rise of a handful of large companies, often referred to as national champions, who, aided by policy, now command far greater sway over the economy than ever before. These forces, operating in tandem, appear to have made the larger corporate sector reluctant to invest and emerge as competition to the big groups in the following manner.

One, the concentration of political power and the decline in the relative power of regional parties have meant that the patronage and protection that was afforded to the smaller and regional firms, who could rise up and become national players, has dried up. Two, policy uncertainty, raising the barriers to entry and an uneven playing field in favour of these larger corporates, has made it more difficult for new players to emerge. Companies, both domestic and foreign, are unlikely to invest if they fear that the rules of the game can be arbitrarily changed, or that they can be caught on the wrong side of policies. Policy credibility matters. And third, the fear of being muscled out by the national champions — that business success will be met by a hostile takeover. These risks seem to be deterring both domestic and foreign investors from committing to big investments in the country. It’s not a question of being allowed to operate, but whether investors have the confidence of being able to stay in business and remain competitive over the next 10-20 years.

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Accepting these arguments would imply that for the larger corporate sector to ramp up investments, for competition to emerge, the strategy of relying on a few national champions needs to be rethought. This could, however, have far-reaching political ramifications.

After all, the rise of a larger number of big private players would mean that economic power gets dispersed, not concentrated. That could, in turn, increase the funding avenues available for Opposition parties, which would possibly weaken the concentration of political power. Greater economic competition could then lead to greater political competition. This raises the questions: Does the current political structure create the space for new players to safely invest and emerge as competitors to the national champions? Or, is market concentration politically useful?

All this means that even if the ingredients for an investment boom — an undervalued exchange rate, depressed real wages, and sustained public sector investment in infrastructure, all of which, along with the demographic dividend, powered the rise of countries like China and South Korea – are present, firms are likely to remain hesitant. They will remain unsure about investing, without a change in the approach. After all, investment decisions are taken only when investors think that they have a fair chance of benefiting. And the consequent absence of competition only raises the possibility of the emergence of an uncompetitive, high-cost economy.

Till next time,

Ishan

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