Private Investment: Intentions versus Realization

Abstract

This note examines the growing mismatch between intended private capex and actual fixed assets creation, shedding a fresh light on the longstanding weakness of private investment in India. Using the RBI’s data on projects financed by bank and non-bank financial entities, which is collected annually to gauge the private investment outlook each year, we analyse the significant drop in the extent of planned capex that materialized into actual investment (as measured in the national accounts). We find successive drops in the percentages, especially after the global financial crisis, and thereafter in 2011-12, since when it has remained in the 10% region. We examine a number of potential reasons, like the shift to alternate funding sources – external and internal - not captured in the data, and inflated expectations or over-optimism of private agents, who may subsequently be shedding or scaling back planned projects. We speculate if the planned-to-realized capex ratio or survey-based business expectations are accurate lead indicators as compared to, for example, bank credit, to identify which is a better gauge of demand.