The economic landscape in India has been experiencing a notable downturn in private investment, casting shadows of concern over the country’s growth prospects. This downtrend, tracked through the private Gross Fixed Capital Formation (GFCF) as a share of GDP at current prices, has become a critical point of deliberation among policymakers and economists alike. Despite efforts by the government to jump-start the flow of private capital, the anticipated boost seems to have eluded the nation’s economic machinery.
Private GFCF represents the net increase in physical assets within the private sector, encompassing investments in infrastructure such as buildings and machinery. This measure stands as a key gauge of private sector commitment to economic growth, while overall GFCF includes the investment footprint of the government as well. The significance of GFCF cannot be overstated, given its role in bolstering economic output, aiding in productivity enhancement, and elevating living standards in the process.
The United States and other developed nations ostentatiously feature a higher per capita fixed capital compared to developing countries like India. The disparity underscores the investment gaps that exist between economies at different stages of development. India observed a significant surge in private investment post the economic liberalization reforms introduced in the late 1980s and early 1990s, which infused a new sense of confidence within the private sector. Until the season of liberalization, private investment hovered at around 10% of the GDP, with public investment surpassing it in the early 1980s. A subsequent decline in public investment occurred after liberalization, granting the private sector the lead in capital formation.
However, this upward trajectory in private investment faced a stark reversal post the 2007-08 global financial crisis. The once burgeoning figure of nearly 27% of GDP recorded in 2007-08 shrank to a mere 19.6% by the fiscal year 2020-21. Since 2011-12, a consistent slump has been evident, defying government measures like the corporate tax cut in 2019, which marked a decrease from 30% to a more palatable 22%, aimed at stimulating investment.
Several Indian economists attribute this investment paralysis to subdued private consumption expenditure, arguing that robust consumer spending is a prerequisite for businesses to confidently invest in expanding their production capacity. Their solution lies in increasing disposable income among citizens to rejuvenate consumption and, consequently, private investment. This correlation, however, does not hold strong in a historical context. India’s economic narrative reveals that decreases in consumption expenditure have paradoxically aligned with spikes in private investment. In a twist of fate, private final consumption expenditure plummeted from around 90% of GDP in the 1950s to about 54.7% in 2010-11. Intriguingly, the period leading up to 2011 saw private investment attain its zenith before embarking on a downward journey.
The counterintuitive inverse relationship observed between consumption and investment may root from the fundamental economic principle that saving and investing come at the expense of immediate consumption. As such, funds earmarked for savings and investment detract from the consumption pool.
An alternative school of thought points to structural hiccups as the real culprits behind the deterring investment climate. Critics cite sluggish reforms and policy uncertainties as significant deterrents for investors, who naturally covet stability for their long-term commitments. The investment boom of the 90s and early 2000s rode on the liberalization wave initiated in 1991, while the recent investment downturn coincides with a deceleration in reform momentum witnessed across successive governments.
The repercussions of waning private investment are far-reaching, most notably reflected in dampened economic growth prospects. While some preach the necessity of heightened government investment to fill the void, others warn against its potential to “crowd out” private initiative. Furthermore, there is widespread belief in the superior efficiency of private firms in allocating capital compared to public sector counterparts, with the added burden of taxation to finance public projects posing a considerable drag on economic vigor.
In sum, while the Indian government attempts to resuscitate the investment landscape, the intricate dynamics of private GFCF pose a formidable challenge requiring a blend of insightful policy-making and strategic economic interventions.
