Opinion | Private Investments: The Missing Spark In India’s Growth Engine
Unlike government spending, which is constrained by fiscal limitations and potential inefficiencies, private investment is guided by market dynamics, ensuring efficient capital allocation, fostering innovation, and enhancing productivity
India’s economic trajectory stands at a defining crossroads. After years of government-led capital expenditure driving infrastructure expansion and economic resilience, the next phase of growth must be powered by private-sector investments. The challenge now is to catalyse a decisive resurgence in corporate investments, ensuring a sustainable growth model that is not overly reliant on public spending.
But even as the government lays down the red carpet for private investments, recent reports suggest that much of India’s private capital seems to prefer boarding a flight rather than breaking ground at home. Why is India Inc. hesitant to bet big on its own turf?
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Let’s take stock of the current state of private investments and the factors holding them back.
A closer look at India’s investment landscape reveals a structural slowdown in capital formation. Gross Fixed Capital Formation (GFCF) – a key indicator of investment activity – has been sluggish for over a decade. After peaking in 2011-12, real investment levels declined for several years before stabilising post-2017. Even after a post-pandemic recovery, real investment in 2021-22 was only 6 per cent higher than pre-Covid levels. More specifically, India’s investment rate, GFCF as a percentage of GDP, remains nearly four percentage points lower than that in 2011-12, despite recent upticks.
The primary culprit? Sluggish private corporate investment. Despite multiple policy incentives, private investment accounts for only about one-third of total investments. Between 2015 and 2020, it largely stagnated, reflecting deeper structural constraints.
For India to sustain GDP growth rates at 7-8 per cent, the investment rate must rise from the current 30 per cent to at least 35 per cent of GDP in the coming years (vis-à-vis. 40 per cent in China), with the private sector playing its part. Empirical evidence underscores that private investment is a more potent driver of long-term economic growth than public expenditure. Unlike government spending, which is constrained by fiscal limitations and potential inefficiencies, private investment is guided by market dynamics, ensuring efficient capital allocation, fostering innovation, and enhancing productivity.
TRENDS IN INDIA’S INVESTMENTS
One common critique of India’s investment strategy is that public capital expenditure remains heavily concentrated in roads and railways, leading to diminishing efficiency gains. Last year, capital expenditure saw a substantial increase—28 per cent for roads and 52 per cent for railways. This year, the government is encouraging the private sector to take the lead in these investments. In the recent budget, allocations for road transport and highways grew by 3.3 per cent, while railway investments remained largely unchanged.
Other growing investment areas in absolute terms include real estate, dwellings and professional services along with manufacturing—a positive sign given the urgent need to stabilise and expand industrial activity. Additionally, investments in transport, storage, and communication infrastructure—which involve large-scale funding for telecom and logistics—saw a sharp rise between 2017-18 and 2019-20. These trends indicate a broader investment push into critical enablers of economic productivity rather than an exclusive focus on transport infrastructure alone.
While public capital expenditure has spearheaded infrastructure development, especially in roads, railways, energy, and digital connectivity; the baton must now pass to the private sector. A renewed surge in private investment can act as a force multiplier, boosting productivity, accelerating job creation, and deepening India’s integration into global value chains.
Private investment, however, remains concentrated in transport, communication, storage, and manufacturing, while sectors critical to equitable growth such as agriculture, water, and utility services, attract relatively lower investments.
Worryingly, the private sector’s contribution to infrastructure investment has declined over time. In 2008, private investment accounted for about 37 per cent of total infrastructure spending, but by 2018, this share had dropped to 25 per cent, placing an increasing burden on the state to bridge the gap.
In comparison to the Indian neighbour (China), India has secured just a third of the private infrastructure investment over the past decade. And within infrastructure per se, private investments remain largely concentrated in the energy sector followed by roads while sectors that have lower returns or slower offtake like urban infrastructure, power distribution, water supply & sanitation, are found wanting.
A less widely discussed but crucial aspect of India’s investment landscape is the role of household sector investments. Between 2011-12 and 2013-14, household investments accounted for a staggering 42.6 per cent of total fixed investment. Although this declined to 39.5 per cent by 2019-20, it remains a significant driver of capital formation, particularly through personal investments in housing and dwellings, as well as investments by informal enterprises.
This trend raises important questions about India’s over-reliance on corporate sector incentives to spur investment. Policy discussions often focus on tax breaks and credit incentives for large corporations, overlooking the broader investment dynamics shaped by households and unregistered small and micro enterprises.
WHAT’S HOLDING BACK THE INDIAN PRIVATE INVESTMENTS? ECONOMICS 101
Despite a broadly conducive macroeconomic environment for investment, India’s real GDP growth for FY25 is projected at 6.4 per cent, with private consumption expenditure expected to rebound. However, several structural barriers continue to stifle private sector expansion.
India’s cost of capital remains one of the biggest deterrents to private investment. Historically, a decline in interest rates has coincided with increased investment activity. However, recent rate hikes aimed at curbing inflation have once again raised borrowing costs, potentially dampening investment momentum. Bank credit growth rate has also been slow.
Additionally, the growing financialisation of the Indian economy, marked by the rise of financial instruments and greater integration with the global markets, has incentivised firms to prioritise short-term financial returns over long-term capital investments.
While corporate profitability has shown signs of recovery, many firms remain burdened by high debt. Interest coverage ratios, which reflect debt-servicing capacity, remain lower than pre-2008 levels. Volatile profit growth and subdued capacity utilisation—still below 2010-11 levels—further constrain firms’ appetite for fresh investments.
Finally, India’s rusted chain of regulatory landscape continues to hold back the wheels of private investments. Sectoral restrictions, labour market rigidities, and the dominance of state-owned enterprises in key industries crowd out private sector participation. Complex exit procedures and capital controls create uncertainty for foreign investors.
Unlike many global markets, India prohibits leveraged buyouts, limiting the ability of private equity firms to acquire and revitalise companies using borrowed funds. This restriction can deter investment, particularly in sectors where leveraged buyouts are a common strategy for restructuring and growth. It needs to be seen whether these buyouts can unlock private sector investment potential in India.
Reviving private investment is not just an economic imperative but a strategic necessity for India’s long-term growth ambitions. The high-level committee for regulatory reform announced in the budget is a welcome step and should prioritise removing sector-specific bottlenecks, ensuring a competitive cost of capital, and fostering a regulatory environment that encourages long-term capital formation, such as streamlined exit procedures. Rather than focusing exclusively on corporate tax incentives, a broader strategy—including financial deepening for smaller enterprises, incentives for R&D investments, and targeted labour law reforms—could unlock new investment opportunities. However, a crucial foundational step is engaging with private investors to identify the real constraints holding them back.
India stands at the cusp of a transformational growth phase. But for this transformation to materialise, the missing piece of the puzzle, i.e., private sector investment must fall into place.
Dr Megha Jain is Assistant Professor/Visiting Fellow, Shyam Lal College/ Pahle India Foundation, University of Delhi, Delhi; and Sakshi Abrol is Doctoral Researcher, RLC Campus Bonn, University of Bonn, Germany. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.
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