Why tax cuts and cheap loans didn’t revive corporate India?
Corporate investment as a share of GDP has been falling in India since 2016, and the decline has not reversed even with tax cuts and record low interest rates. That’s the central finding of a new analysis by economists Rohit Azad and Indranil Chowdhury.
The numbers are stark. Investment peaked at 17.3% of GDP in 2007-08. It fell during the Global Financial Crisis, recovered, then collapsed after demonetisation in 2016. By 2024-25 it stood at 10.3% — below even GFC levels. Covid made it worse, but the fall started earlier.
What explains this? The authors argue investment depends on 3 things: expected profitability, business confidence, and cost of credit. Here, size matters.
For small firms, the problem is credit. Their cost of capital rises sharply once they exhaust own funds. Interest rates matter a lot. Demonetisation hit them hardest by killing cash flows and credit access. Many MSMEs shut down.
For large firms, the problem is demand. They have economies of scale and lower interest costs, but they won’t invest if they don’t see buyers. The “animal spirits” or confidence is low. When expectations turn pessimistic, even 0% interest won’t help.
Data from 1,224 manufacturing firms between 2000-2024 shows this split. Small firms have lower profitability but higher interest costs. Large firms have higher profitability but face flat demand.Policy so far has targeted the wrong lever. Corporate tax was cut to 22% in 2019. RBI kept rates low. But investment didn’t revive. That’s because for large firms, cheaper loans don’t create customers. For small firms, even cheap loans can’t fix a broken balance sheet.
The authors argue the only way out is government spending as “autonomous stimulus”. Public investment can push demand, raise profitability, and crowd-in private investment. But that means giving up on fiscal hawkishness.Until then, India risks a prolonged investment winter — where neither tax cuts nor low rates are enough.