Will our new investment cycle be Keynesian or Schumpeterian?

Andreessen wrote a prescient essay in April 2020 calling for a new era of ambitious building: “aggressive investment in new products, in new industries, in new factories, in new science, in big leaps forward." The essay was written when countries around the world were struggling to cope with the pandemic shock. Healthcare systems were crumbling under pressure. Vaccines were still in the future. His call for a new wave of building was aimed at the US, but there were lessons for other countries as well.

The pandemic is now over. This is a good time to ask whether the world is actually entering a new era of asset creation that Andreessen called for in April 2020. There are signs that many countries are pivoting towards bringing manufacturing closer home, rebuilding energy systems to deal with the threat of climate change, rethinking transport systems as well as personal mobility, and creating new infrastructure. Is this decade going to be marked by a massive capex boom?

It is perhaps not a global phenomenon. There is no doubt that the US is seeing a capex boom, thanks to the policy push from the Joe Biden administration. China is investing heavily in new technologies, but its main macroeconomic requirement is to stimulate domestic consumption after many decades of aggressive investments —and even over-investments—that helped pull it out of poverty. Europe is somewhere in the middle.

What about India? The main story is widely known. Private sector investment slowed down after 2012, as companies were burdened with excess capacity as well as high levels of debt. Banks saddled with a mountain of bad loans were not in a mood to take risks either. The government has pivoted towards capital spending in the past few years, especially on physical infrastructure. The hope is that public sector investment will eventually attract more private sector investment. There are now some signs of this happening, but there have been too many false dawns in recent years (including over-optimistic calls in this column about a revival of corporate investment activity).

In this context, a recent report by Paul Gruenwald of S&P Global Ratings, Dharmakirti Joshi of Crisil and Rajiv Biswas of S&P Global Market Intelligence makes for interesting reading. They say that capital accumulation will be the dominant driver of Indian economic growth over the next decade, of an estimated 6.7% a year on average. It will contribute more than half of the additional economic output over the next 10 years. The rest will be from productivity growth and an increase in the labour force, in that order. The authors also call for an increase in labour force participation, especially by women.

There are two main types of asset creation other than construction activity—new capacity in existing industries and the growth of new industries. Take the automobile sector, for example. It makes a difference whether new investments are expanding factory lines for cars run on internal combustion engines or creating an electric vehicles industry from scratch. This column had previously made the distinction between Keynesian and Schumpeterian investment cycles, the former based on output gaps while the latter is based on creative destruction. That distinction matters when looking at macroeconomic data in the context of the ongoing green transition. “Much of the discussion about the private-sector investment cycle tends to focus on the state of existing capacity utilization by existing companies. However, the next decade could also see new investments because of structural shifts towards a digital and decarbonized economy," this column had noted in November 2021.

In a recent interview, the chief financial officer of a leading Indian capital goods company said that more than half his order book is from green energy projects, though some of this reflects foreign rather than Indian demand. An earlier report from analysts at Crisil estimated that investments from the production-linked incentive scheme and new-age sectors would grow in importance in the overall Indian capex mix—from barely 1% in fiscal 2021-22 to 17% between fiscal years 2022-23 and 2026-27.

There is growing confidence that the private sector investment cycle in India is gradually recovering, which will be one of the important building blocks of sustained growth in the coming years. It is worth watching how it will be distributed between Keynesian and Schumpeterian projects, or old industries and new ones.

The world has seen five long waves of technological innovation in industry. The first was led by textiles, iron and water. The second was about steam power, railways and steel. The third was led by cars, plastics and electricity. The fourth had petrochemicals, electronics and aviation. The fifth was powered by microprocessors, software and digital networks. The world could now be entering a sixth wave of green energy, robots and artificial intelligence.

The policies needed to support investment at the technology frontier tend to be very different from those needed to push a country closer to that frontier in a catch-up game. This key distinction is often missed in policy debates.

Niranjan Rajadhyaksha is executive director at Artha India Research Advisors, and a member of the academic advisory board of the Meghnad Desai Academy of Economics.