Vroom of investment in the automotive sector: A sign of revival in private sector investment spending?

India’s second-largest carmaker has spending plans ₹crore over the next 10 years – partly through General Motors’ acquisition of the Talegaon facility, but most of it will be allocated to electric vehicles, which includes a plan to develop electric vehicle charging networks and component supply. However, Hyundai is not the only one.

Other manufacturers have also planned major investments to bring more vehicles to market, with a variable mix of fuel tanks and batteries to power them, as we move towards cleaner streets. For example, Tata Motors is planning to release ₹18,000 crore on electric by 2029-30, Mahindra and Mahindra above ₹20,000 crore by 2026-27, mainly on electric vehicles, and market leader Maruti Suzuki ₹1.25 trillion by 2030-2031 across technology platforms.

While India’s transition to clean energy requires a commitment of fresh capital, the spending plans also reflect broader optimism about demand. A lot of money will be spent on increasing capacity. And given that the auto sector accounts for a significant portion of factory output in India, this will result in an overall increase in corporate spending and could trigger waves of capital spending in other sectors as well.

India Inc.’s improved business prospects are reflected in its optimism. Sanjiv Puri, president of the Confederation of Indian Industry (CII) and head of ITC Ltd, observed that private investment is increasing and household consumption in India has not only crossed the pandemic-level threshold but is growing steadily, unlike many other countries. Given the expected improvement in the global trade situation in 2024–2025, the industry’s growth prospects look promising.

Private investment in fixed assets such as plant and machinery was 23.8% of GDP in nominal terms in 2022-23, an increase of over 3 percentage points compared to 2020-21. The money has been invested in various sectors such as infrared-powered cement and steel, in addition to areas such as electronics, food processing and renewable energy, mainly through government incentives. However, gross fixed capital formation in the private sector is still below the level of 27% in 2011–2012.

It’s obvious that it still needs to grow. With capacity utilization at around 75%, a large proportion of companies may be ready to invest in new assembly lines etc. There is no doubt that demand in many product markets is patchy and rural India is lagging behind. However, with household incomes trending upwards, the old supply options cannot last long.

Throughout this decade, the government made significant investments to fuel the economy, increasing public capital expenditures to get money into the hands of people in the hopes of attracting private investment along the way. As the rollback of public finances is now a fiscal necessity, the Center needs the private sector to play the role of investor-in-chief.

A revival in demand, while necessary, may not be all the economy needs. The fact that companies are reluctant to reinvest most of their recent profit increases after the sharp cut in corporate tax suggests a different kind of confidence gap. Perhaps a renewed focus on factor market reforms could plug this shortfall and accelerate private capital formation.