Foreign Firms’ Investment Intensity in India Declines Since FY20, EAC-PM Report Shows
A working paper from the Economic Advisory Council to the Prime Minister (EAC-PM) indicates that foreign-owned companies operating in India have experienced a continuous decline or lack of recovery in fixed-asset investment intensity since financial year 2020-21 (FY21), while overall corporate investment patterns have shifted significantly across the country.
What Happened
According to the report titled ‘An investigation into corporate profits and investment’, the weighted-average investment intensity—defined as the ratio of annual investment in fixed assets relative to total assets held at the beginning of the financial year—partially rebounded among Indian private firms following the pandemic, but has remained largely flat since FY22.
Growth in gross fixed assets stood at 10.64 per cent in FY15 and reached 9.94 per cent in FY20. It contracted to -1.06 per cent during FY21 amid the pandemic before recovering to 6.1 per cent by FY24. The study characterized this overall rebound in fixed-asset growth as muted.
When examining fixed-asset investment as a share of gross domestic product (GDP), foreign-owned enterprises demonstrated no recovery following FY21. In contrast, Indian business groups registered a steady increase. Meanwhile, government-owned enterprises and independent Indian private firms experienced a subdued initial rebound, followed by flat or declining patterns up through FY24.
Key Highlights
- Shift in Growth Distribution: The investment peak seen in FY20 was previously driven by asset-heavy, high-intensity firms recording investment intensity between 12 and 14 per cent. Post-pandemic, these high-intensity outlier firms vanished, and current recovery is instead driven broadly by median-level firms.
- Absence of Superstar Firms: The report notes that India lacks ‘superstar firms’ in frontier fields such as generative artificial intelligence and related sectors, which typically scale research, development, and high-intensity capital deployment.
- Declining Marginal Profitability: While average company profitability has increased, the marginal profitability of new capital has fallen after the pandemic. Companies are earning profits on existing infrastructure but delaying fresh capital outlays due to lower anticipated returns on new investments.
- External and Competitive Pressures: Factors dampening marginal profitability include domestic rivalry, import competition, foreign trade partner export subsidies (such as from China), and global industrial overcapacity.
- Technology and Obsolescence: Rapid developments in generative AI have prompted companies to hold back on existing technologies to avoid rapid depreciation and premature obsolescence.
Why This Matters
The findings explain why rising corporate profits have not translated directly into an aggressive capital expenditure boom. As marginal returns on additional capital soften and technological shifts create uncertainty around asset lifespans, businesses choose to preserve cash on existing assets rather than commit to new long-term physical projects.
What to Watch Next
The report suggests that investment spending tied to technological upgrades may normalize once the broader generative AI and technology landscape stabilizes, potentially reducing the risk of accelerated asset depreciation for businesses.
Frequently Asked Questions
How does the EAC-PM paper define investment intensity?
Investment intensity is measured as the ratio of a firm’s annual spending on fixed assets compared to the total assets it owned at the start of that financial year.
Why are profitable firms hesitating to make new capital investments?
The paper highlights that despite healthy average profits, marginal profitability on new investments has decreased. Factors such as international overcapacity, import competition, subsidies abroad, and technological uncertainty cause firms to expect lower returns on new capital outlays.
Source: EAC-PM report, as reported by Business Standard.