India’s economy is booming. Stock prices are through the roof, among the best performing in the world. The government’s investment in airports, bridges and roads, and clean-energy infrastructure is visible almost everywhere. India’s total output, or gross domestic product, is expected to increase 6 percent this year — faster than the United States or China.

But there’s a hitch: Investment by Indian companies is not keeping pace. The money that companies put into the future of their businesses, for things like new machines and factories, is stagnant. As a fraction of India’s economy, it is shrinking. And while money is flying into India’s stock markets, long-term investment from overseas has been declining.

Green and red lights are flashing at the same time. At some point soon, the government will need to reduce its extraordinary spending, which could weigh on the economy if private sector money doesn’t pick up.

No one expects India to stop growing, but a rise of 6 percent is not enough to meet India’s ambitions. Its population, now the world’s biggest, is growing. Its government has set a national goal of catching up to China and becoming a developed nation by 2047. That kind of leap will require sustained growth closer to 8 or 9 percent a year, most economists say.

Foreign direct investment in India

The missing investment could also present a challenge for Narendra Modi, the prime minister since 2014, who has concentrated on making India an easier place for foreign and Indian companies to do business.

Mr. Modi is in campaign mode, facing elections in the spring and rallying the nation to cheer his successes. The sluggish investment is not something executives, bankers or foreign diplomats like to discuss, for fear of looking like naysayers. But investors are playing it safe while the economy is signaling both strengths and weaknesses.

One point of widespread agreement is that India should benefit from China’s slowdown, which has been fueled by an unfolding property crisis. China’s geopolitical tensions with the West present another opening for India, by motivating foreign companies to move production in China to other countries.

A market at night amid concrete pylons above for a road under construction.
The site of a new metro station and flyover in the Indian capital, New Delhi. The government’s investment in airports, bridges and roads, and clean-energy infrastructure is visible almost everywhere.Credit…Rebecca Conway for The New York Times
A worker wearing a bright green safety vest is sweeping in the middle of a construction site.
But while money is flying into India’s stock markets, long-term investment from overseas has been declining.Credit…Rebecca Conway for The New York Times

Sriram Viswanathan, an Indian-born managing partner at Celesta, a Silicon Valley venture capital fund, describes investors “wanting to fill the vacuum that has been created in the supply chain.”

“That, I think, is the opportunity for India,” he said.

The World Bank has applauded India’s commitment to infrastructure spending, which ramped up during the pandemic when the private sector needed rescuing. Since then, the government has doubled down, paying for bricks-and-mortar improvement to the rickety roads, ports and power supply that once discouraged business investment.

But the World Bank, whose mission is to nudge developing economies higher, says it is critical that those billions’ worth of government spending ignite a burst of corporate spending. Its economists speak of a “crowd-in effect,” which happens when, for instance, a new port next to a shiny new industrial park lures companies into building plants and hiring workers. Last year, the bank said it anticipated an imminent crowding-in, as it has forecast for almost three years running.

“To accelerate the growth of confidence, public investment is not enough,” Auguste Tano Kouamé, the World Bank’s country director for India, said at a news conference in April. “You need deeper reforms to make the private sector invest.”

A lack of confidence helps explain why the stock markets are setting records, even while foreign investors are backing away from buying into the Indian economy through start-ups and acquisitions.

Narendra Modi walking in a blue traditional outfit onstage with bright colors on the wall behind him. A podium nearby says the words “ICC Men’s Cricket World Cup Final 2023” on it.
India’s prime minister, Narendra Modi, in Ahmedabad in November. One reason businesses are watching and waiting to make investments is Mr. Modi’s powerful national government.Credit…Atul Loke for The New York Times

The stock markets in Mumbai, India’s business capital, are worth nearly $4 trillion, up from $3 trillion a year ago, making them more valuable than Hong Kong’s. India’s small investors have been a big part of that, but trading stocks is quick and easy, compared with buying and selling companies. A recent annual average of $40 billion in foreign direct investment has shrunk to $13 billion in the past year.

One reason that businesses are watching and waiting to make investments is Mr. Modi’s powerful national government.

On the one hand, business craves stability in political leadership, and India has rarely, if ever, had such a well-entrenched leader. He demolished the main opposition party in three big elections across the Hindi-speaking heartland in December and looks like a shoo-in for re-election this year. And Mr. Modi is vocally pro-business.

His government plays a markedly interventionist role in managing the economy, in a way that can make it dangerous for firms to place their stakes.

In August, the government announced sudden restrictions on the import of laptop computers, to spur production at home. That sent businesses that depend on them into a tailspin, and the measure was almost as suddenly withdrawn. Likewise in July, the government slapped online betting companies with a retroactive 28 percent tax, gutting a $1.5 billion industry overnight.

Workers wearing hard hats and safety vests at a construction site, with two of them seen tending to visible long pipes.
Workers in Dholera, an industrial park in the state of Gujarat, in August. The World Bank has applauded India’s commitment to infrastructure spending, which ramped up during the pandemic.Credit…Atul Loke for The New York Times
People in blue suits working on a ship inside a factory.
“To accelerate the growth of confidence, public investment is not enough,” Auguste Tano Kouamé, the World Bank’s country director for India, said at a news conference in April. “You need deeper reforms to make the private sector invest.”Credit…Atul Loke for The New York Times

Businesses close to Mr. Modi and his political circle have done especially well. The most prominent examples are Mukesh Ambani’s Reliance Industries and the Adani Group, conglomerates that reach into numerous areas of Indian life. Their combined market power has grown gigantic in recent years: The flagship stocks of each company are worth about six times more than they were when Mr. Modi became prime minister.

Some smaller companies have been the target of high-profile raids by tax-enforcement agencies.

“If you’re not the two A’s” — Adani or Ambani — it can be treacherous to navigate India’s regulatory byways, said Arvind Subramanian, an economist at Brown University who served under Mr. Modi’s government as chief economic adviser from 2014 to 2018. “Domestic investors feel a little bit vulnerable,” he added.

The past nine years of Modi government have improved many things in the business environment for all. Crucial systems work better, many types of corruption have been reined in and digitization of commerce has opened up new arenas for growth.

“What is really complex and interesting about this Modi phenomenon is that there’s a lot of hype and bluster and manipulation,” Mr. Subramanian said. “But it’s built on a core of achievement.”

Still, foreign officials charged with bringing billions of investment capital to India complain that much of the traditional pain of doing business in India lingers. The one most frequently cited is red tape. Too many officials get involved at every level of approval, and it remains painfully slow to obtain legal judgments, let alone to enforce them.

People walking through and browsing goods at the stalls in a market square.
Foreign officials charged with bringing billions of investment capital to India complain that much of the traditional pain of doing business in India lingers.Credit…Rebecca Conway for The New York Times
People sitting at a stall near a busy road filled with bikes, many of which are pulling carts piled high with packages.
The biggest wild card is whether India can grab a significant share of global business from China. Credit…Rebecca Conway for The New York Times

Another factor holding back longer-term investment is an underlying weakness in “the India growth story.” The most powerful source of demand, the kind that foreign investors and domestic businesses covet, is among the wealthiest consumers. In a population of 1.4 billion, about 20 million Indians are doing well enough to buy European consumer products, build luxury homes and beef up the top tier of the automotive sector.

Most of the rest of the population is struggling with inflation in food and fuel prices. Banks are extending credit to consumers of both kinds, but less so to businesses, which fear that the great majority of their customers will be tightening their belts for years to come.

“For the moment, there is no evidence that investors are feeling reassured about India,” Mr. Subramanian said.

But he remains hopeful. The annual growth, even if less than 6 percent, is nothing to sniff at. The new and improved infrastructure should attract more private investment eventually. And the benefits of consumer wealth, unevenly distributed as they are, could over time raise up more incomes.

The biggest wild card is whether India can grab a significant share of global business from China. The highest-profile example is Apple, the $3 trillion megacompany, which is slowly moving some of its supply chain away from China. Its pricey iPhone has barely 5 percent of the Indian market. But currently about 7 percent of the world’s iPhones are made in India — and JPMorgan Chase has estimated that Apple intends to get that to 25 percent by 2025. At that point, all kinds of things become possible for India.

“We should keep our minds open,” Mr. Subramanian said.

A shadow walking in front of a poster of Mr. Modi.
Businesses close to Mr. Modi and his political circle have done especially well. Some smaller companies have been the target of high-profile raids by tax-enforcement agencies.Credit…Kenny Holston/The New York Times
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