India’s private investment has a problem. Corporate profits have surged, but companies are still reluctant to invest.

The Economic Advisory Council to the Prime Minister (EAC-PM), in a working paper released on August 12, suggested doubling down on two policies the government has already been using — production-linked incentives (PLI) and public investment.

The recommendations are puzzling.

The council’s analysis showed that private corporate investment has been weak despite years of higher government spending and the rollout of PLI schemes. But instead of asking why those policies have not delivered a stronger private investment response, it recommended more of both.

Other recommendations, such as supporting innovative firms, strengthening industry-academia links, and improving mechanisms to enforce contracts and resolve business disputes, are hardly new. Economists and industry experts have long argued for them.

The more consequential recommendations are the first two. And the evidence presented in the paper does not make a strong case for either.

Profits Are Up. So Why Isn’t Investment?

The EAC-PM found that the post-pandemic recovery in private corporate investment has been substantially weaker than the recovery in profits. Investment, measured by the change in gross fixed assets (GFA), grew 6% in FY24, while profit before interest and tax (PBIT) grew 21%.

The council said the weaker investment growth was because of four factors: (a) the disappearance of high investment intensity among certain large, asset-rich companies after the pandemic; (b) uncertainty and imbalances in the global economy; (c) anticipated technological change and the threat of obsolescence, including from artificial intelligence; and (d) declining marginal profitability.

It ruled out market concentration and financial frictions as major factors. More than 90% of corporate assets, it said, have either faced no change or higher competition pressures. On financing, 82.4% of the total asset share has been associated with deleveraging and a reduction in the debt-to-equity ratio (DER).

But one conspicuous omission is aggregate demand.

The report acknowledged that a recovery in demand “enhanced” manufacturing capacity utilisation and profits, but did not separately examine whether weak demand held back companies from investing in new capacity.

A Bigger Company Isn’t Always A Bigger Investor

The EAC-PM’s case for its recommendations was partly based on what its firm-level data show.

The median firm, the council said, has become larger since FY21 in terms of capital employed, PBIT, revenue, employee costs, average total assets and changes in gross fixed assets. This has also been accompanied by an improvement in firm-level returns on average assets.

But that does not necessarily mean companies are ready to make fresh investments.

Abhishek Anand, former World Bank economist and visiting fellow at the Madras Institute of Development Studies, said, “The EAC-PM result says that the median surviving firm in its sample has become larger and more profitable. That establishes that returns on existing corporate assets have improved. It does not establish that the expected return on a new, irreversible investment – after accounting for policy and regulatory risks – is sufficiently attractive.”

A company can make more money from assets it already owns without concluding that it should spend more money on new ones.

Interestingly, the advisory body encountered the same road bump. It found that return on new investment, or marginal profitability, is declining, putting “downward pressure on firm-level investment”.

But rather than investigate why marginal profitability is falling, the report left the matter unresolved: “Marginal profitability can decline due to several reasons including higher competitive pressures from both domestic firms as well as imports… ”

That should have been a starting point for the analysis, not an unresolved footnote.

Former finance secretary Subhash Chandra Garg also questioned the correlation the EAC-PM draws between profits and investment. He said several other factors at play can affect corporate profitability in India, including price rises, the 2019 corporate tax cut, government subsidies and procurement. Higher government capex, for instance, can itself show up in higher corporate profits.

Economist R Nagaraj, who wrote a paper on declining industrialisation and investment last year, said that “corporate profits have boomed ever since corporate tax rates were reduced in 2019 but the increased profitability has not translated into increased corporate investment”.

Since the 2019 corporate tax cut, the Reserve Bank of India (RBI), SBI Research and Chief Economic Adviser Anantha V Nageswaran have pointed out that India Inc has instead chosen to deleverage, build cash balances, pay higher dividends, buy back stocks or invest abroad rather than restart the domestic capex cycle.

That makes the EAC-PM’s prescription of more incentives and more public investment harder to understand.

Missing Evidence On PLI

So far India’s production-linked incentive (PLI) schemes have only found success in the mobile phone assembly industry.

Nagaraj said it was “difficult to agree” with the recommendation to push PLI incentives, as even in the mobile phone assembly industry “there seems to be very little evidence of backward integration in production of components to augment domestic value addition”.

The timing of the EAC-PM’s analysis is also important.

India began pushing public investment to crowd in private capex in the 2021 budget. PLI schemes were announced in 2020, but the first disbursal began only in September 2022 (FY23).

Since the EAC-PM examines data only until FY24, there is sufficient evidence to assess the public investment push. There is far less evidence to judge whether PLI has worked.

However, the council recommended intensifying both.

Anand said the fact that corporate profits have risen sharply without a corresponding increase in investment “raises questions about further intensifying PLI and govt investment”.

The aggregate data doesn’t help the case.

Private corporate gross fixed capital formation (private GFCF) fell from 11.4% of GDP during FY12-FY17 and 10.8% in FY20, before the pandemic, to 10.6% during FY22-FY24. It fell further to 10.1% in FY24, the latest year for which data are available.

That is a long way below the 16.8% of GDP recorded in FY08.

The EAC-PM does not take note of this decline. Nor does it appear to consider the Economic Survey of 2023-24, which asked India Inc to take the momentum created by public investment forward — to “take forward…on its own and in partnership with the government”.

Nagaraj pointed to a similar problem with public investment. Although it has increased, he said, “there is no perceptible rise in private investment”. One reason, he said, could be that government spending has been concentrated on highways and energy, with limited stimulus for existing industries and MSMEs.

If years of higher public investment have not yet produced a convincing private investment response, the obvious question is whether more of the same is the answer.

The Demand Problem

The EAC-PM played down the role of aggregate demand (by not separately analysing its impact while recognising its role in reviving manufacturing’s capacity utilisation), which is known to be critical for investment in capacity building.

Consumption expenditure began slowing before the pandemic, following demonetisation and the introduction of the goods and services tax, and remained weak thereafter. Yet the report does not separately examine its impact on private investment.

Capacity utilisation provides another clue.

RBI data showed that capacity utilisation had risen to 74.8% in FY24, the latest year examined by the EAC-PM. That was an improvement, but it also meant that a meaningful amount of existing capacity remained unused. It was well below the roughly 80% levels seen during FY10-FY12.

A 2024 Confederation of Indian Industry report said fresh investment would be triggered when capacity utilisation reached 75-80%.

That threshold has since been reached, with capacity utilisation averaging 75.3% from Q1 FY25 to Q4 FY26. That could strengthen the case for a private investment revival if the trend continues for more time.

But it also raises another question of whether companies are only now reaching the level of capacity utilisation that industry considers conducive to fresh investment. Was the problem earlier a shortage of incentives or insufficient demand?

Concentration Is Not So Easy To Dismiss

The EAC-PM also played down market concentration, saying it has moderated and that “more than 90% of corporate assets have either faced no change or higher competition pressures”.

But using the same CMIE data up to FY24, a 2025 Azim Premji University study, “Economic Concentration in India”, offers a different interpretation.

It said the moderation in concentration was driven by “the overall decline in the public sector’s share of assets and income” alongside “a steady increase in the share held by large private business groups”.

“By 2023-24, the top five business groups – Reliance, Tata, Adani, Aditya Birla, and Bharti – accounted for approximately 24% of total assets and 16% of total income in the non-financial corporate sector.” The study also notes that these Big 5 accounted for most of corporate debt, “rising from around 10% in the early 2000s to over 30% by 2023”, the study notes.

Former RBI Deputy Governor Viral Acharya had asked India in March 2023 to “dismantle” these “Big 5”. He argued that they had grown too large over the previous decade and were able to set prices “substantially higher than competitors in the market” in sectors such as retail, resources and telecommunications.

He also said the Big 5 were helped by “sky-high tariffs”, which shielded them from foreign competition.

Acharya had warned against the ‘national champions’ model too: “Creating national champions, which is considered by many as the industrial policy of ‘new India,’ appears to be feeding directly into keeping prices at a high level.”

Nagaraj points to “evidence to suggest a role of monopoly power in polyester and viscose staple fibre” in adversely affecting exports of synthetic and blended fabric garments. He added that, until recently, some QCOs protected large domestic producers to the detriment of labour-intensive manufacturing such as textiles.

Studies from the US and China have also found that market concentration can adversely affect competition and investment — foreign investment in China and domestic investment in the US.

If concentration is affecting competition, prices and investment, dismissing it because more than 90% of corporate assets have either faced no change or higher competitive pressures may be too quick a conclusion.

The Other Gaps

There are still other questions the EAC-PM does not fully address.

The council notes that the “intensity levels” of FDI fell after FY20, but does not attempt to explain why or offer policy prescriptions.

Nagaraj observes that FDI inflows have “hardly contributed” to capital formation and output growth in recent years because much of it is in the form of private equity “which, by definition, does not invest in setting up factories and firms, but acquires shares in existing companies mostly in high end services such as real estate or private healthcare, only to quit when stock market is booming”.

Net FDI was $22 billion in FY24 because of higher repatriation and outbound investment by Indian companies. It fell to $0.96 billion in FY25 but recovered to $6.5 billion during April-May 2026.

There is also the problem of credit access for smaller businesses.

In June this year, Deloitte said only 14% of MSMEs had access to formal credit in FY25, leaving a credit gap of more than Rs 50 lakh crore.

That matters because MSMEs contribute 31% to GDP and 48.5% to exports. A policy framework aimed at reviving private investment would need to consider whether smaller businesses can access the capital required to invest in the first place.

The EAC-PM’s recommendations are therefore not necessarily wrong. But the paper leaves unanswered the more important question of why, after years of higher profits and a sustained push for public investment and industrial incentives, has private corporate investment remained so weak?

Without answering that, prescribing more PLI and public investment risks treating the symptom as the problem. Besides, not addressing other factors that impact investment, like weak consumption demand, a vitiated level playing field for doing business, and inadequate credit availability to MSMEs, leaves huge gaps in policy prescriptions.

Garg’s verdict on the report is blunt. He said, “I find both the diagnosis and recommendations sterile and unilluminating.”