Democratising Capacity Creation

One of the enduring puzzles of the Indian economy is private sector capital expenditure.

For well over a decade, economists, policymakers and business leaders have debated why private investment has remained below expectations. Interest rates have been cut, taxes have been reformed and regulatory processes have been streamlined. Yet every few years the same question returns: when will private capex revive?

My own experience suggests the answer may lie in looking at the problem differently.

What Drives Investment?

Over the past few years, I have had a front-row seat to a business that went from years of relative stability to a period of sustained growth. As demand increased, capacity constraints began to emerge. Machines that once seemed adequate suddenly looked insufficient. Vendors started talking about expanding capacity. Internal conversations shifted from efficiency and utilisation to throughput and bottlenecks.

Without any grand strategic declaration, investment began to happen.

Not because somebody urged us to invest. Not because a consultant produced a report recommending it. Not because capital suddenly became cheap. It happened because demand made the decision obvious.

This may sound trivial, but it is worth dwelling on. Businesses do not invest because they are optimistic. They invest because they are confident enough that future demand will justify today’s expenditure. Demand creates confidence. Confidence creates investment. Investment creates capacity. Capacity creates growth.

That sequence matters because it challenges how we often think about industrial policy.

The assumption underlying many discussions about private investment is that entrepreneurs are waiting for the right policy signal. My experience suggests something different. Entrepreneurs invest when opportunity becomes visible. The challenge, therefore, is not simply how to encourage investment. It is how to create conditions that reward those willing to commit capital when opportunity presents itself.

Businesses do not invest because they are optimistic. They invest because they are confident enough that future demand will justify today's expenditure.

The Limits of Picking Winners

Over the past few years, India has rightly embraced a more active manufacturing strategy. The Production Linked Incentive (PLI) scheme is perhaps the most visible expression of that approach. In sectors ranging from electronics to defence manufacturing, the state has identified areas of strategic importance and created incentives to accelerate investment.

The logic is compelling. India needs domestic capability in critical sectors. It needs to reduce import dependence. It needs globally competitive manufacturing champions. The PLI has undoubtedly played an important role in advancing these goals.

Yet the more interesting question may be whether industrial policy should stop there.

Most incentive frameworks are built on an implicit assumption: that governments can identify where capital should go. But what if the bigger opportunity lies not in directing investment, but in enabling it? What if policy focused less on deciding which sectors deserve support and more on rewarding the act of capacity creation itself?

This may appear to be a subtle distinction. In reality, it reflects two very different ways of thinking about economic growth.

One view assumes that policymakers possess superior insight into the future structure of the economy. The other assumes that thousands of entrepreneurs, responding to millions of market signals, collectively possess that insight.

History suggests the latter is often closer to the truth.

No policymaker could have predicted every category, business model or market that emerged during the past three decades of liberalisation. India’s growth story has largely been written by entrepreneurs spotting opportunities before anybody else did.

Whether it is an entrepreneur opening a factory in Coimbatore, an exporter expanding capacity in Rajkot, a food manufacturer investing in automation in Kochi or an engineering company adding a new production line in Pune, these decisions may seem small in isolation. Collectively, they shape the economy.

From Capital Allocation to Capital Formation

This is where the idea of a Capex Linked Incentive (CLI) becomes interesting.

The proposal itself is straightforward. Instead of rewarding output in selected sectors, reward verified investment in productive capacity across sectors. A company that invests in machinery, automation, manufacturing infrastructure or other productive assets would receive a predefined incentive, tax credit or rebate based on actual investment undertaken and verified. The principle is simple: invest first, claim later.

The attraction of such a framework is not merely that it encourages investment. Its deeper significance lies in how it redefines the role of government.

Rather than acting primarily as an allocator of capital, government becomes an enabler of capital formation.

Rather than acting primarily as an allocator of capital, the government becomes an enabler of capital formation. Instead of trying to identify future winners, it creates conditions that encourage entrepreneurs to make those judgments themselves.

That distinction becomes especially important in an economy as large and diverse as India.

The next wave of growth is unlikely to emerge from a handful of giant projects alone. It will come from thousands of businesses expanding capacity in response to opportunities that may be invisible from New Delhi. In that sense, the objective is not simply to increase capex. It is to democratise capacity creation.

Demand encourages firms to invest. Yet once capacity exists, businesses often begin to think differently. New products become possible. New customers can be served. New markets can be explored. Export opportunities become viable. Capacity does not merely respond to growth; it can help create it.

If a demand signal exists for helmets, packaging materials, machine tools, spices, pumps, lubricants or engineering components, policy should make it easier for those entrepreneurs to expand as well. Not every entrepreneur needs to make semiconductors. A strong manufacturing economy emerges when thousands of firms respond to thousands of market opportunities.

Of course, legitimate questions arise. Would such a scheme be abused? Would it become fiscally expensive? How would productive investment be distinguished from ordinary expenditure?

These are important concerns. But they are largely questions of design rather than principle.

Eligibility could be restricted to productive assets. Claims could be linked to audited invoices and verified installations. Benefits could be capped. Additional incentives could be provided where equipment is sourced from domestic manufacturers.

The details matter. But they should not obscure the larger idea.

The real challenge in reviving private investment is not persuading entrepreneurs to invest when opportunity does not exist. It is creating conditions that reward those who are willing to act when opportunity does.

The success of the PLI demonstrated that industrial policy can accelerate manufacturing growth in strategically important sectors. The next step may be to place greater faith in something equally important: the ability of entrepreneurs to identify opportunities that governments cannot.

Economic transformation rarely begins in policy documents. It begins when thousands of business owners decide that the future is worth investing in. The more widely that capacity creation is distributed, the stronger the economy becomes.