Private Investment in the Indian Economy

Context (TH): The slow increase in private investment is a significant problem for the Indian economy.
Private investment is measured by private gross fixed capital formation (% of GDP).
Private investment has consistently declined since 2011-12.
Impact: Low private investment can lead to slower economic growth because a larger fixed capital base is needed to boost economic output.
In 2019, the government reduced corporate taxes from 30% to 22% in hopes of stimulating private investment.

About GFCF

Gross Fixed Capital Formation (GFCF) measures the growth in fixed capital in an economy.
- Fixed capital includes things like buildings and machinery that require investment to be created.
GFCF is important because fixed capital helps workers produce more goods and services, leading to economic growth and better living standards.
Developed economies like the U.S. have more fixed capital per person compared to developing economies like India.
Private GFCF gives an idea of how much the private sector is investing in the economy.
It also includes government investment in fixed capital.

Before economic reforms, private investment hovered around 10% of the GDP. Public investment, however, steadily rose over the decades, surpassing private investment as a percentage of GDP by the early 1980s.
After the Economic reforms, Private investment in India increased significantly, which boosted confidence in the private sector.
- After liberalisation, private investment took the lead in fixed capital formation, while public investment declined.
- Private investment continued to grow until the global financial crisis of 2007-08, reaching around 27% of GDP.
- Since 2011-12, private investment has been declining, hitting a low of 19.6% of GDP in 2020-21.

Economists argue that businesses need strong consumer spending to have confidence in future demand for their products before investing in fixed capital.
To address this, economists suggest the government should increase people’s disposable income to boost consumption expenditure and stimulate private investment.

However, historically, an increase in private consumption has not necessarily led to higher private investment in India.
In fact, a drop in consumption spending has sometimes boosted private investment. Since 2011-12, private consumption has risen while private investment has fallen.

Few Economists point to unfavourable government policies and policy uncertainty as major issues affecting private investment.
The increase in private investment in the 1990s and 2000s was linked to the economic reforms initiated in 1991.
Conversely, the decline in private investment correlated with a slowdown in the pace of reforms over the last two decades under both UPA and NDA governments.
Policy uncertainty can discourage private investment because investors prefer stability to undertake risky long-term projects.

Some see the government’s push to increase government investment as negative because it may crowd out private investment. However, others believe that government investment offsets the lack of private investment.
Private investors are considered better allocators of capital than public officials, which helps prevent wasteful spending.
Taxes imposed to raise money for public spending can also weigh heavily on the economy.

“Crowding out” refers to a situation where government spending (which is part of fiscal policy) discourages (private) investment spending in the economy.