Why in news?

Although India’s real GDP growth rates appear robust, policymakers remain cautious, signalling concerns about the underlying economic strength. The persistent weakness in private sector investment — despite multiple policy incentives by the government — continues to be a major challenge and a key constraint on sustaining long-term economic momentum.

What’s in Today’s Article?

• Declining Investment Share in GDP Highlights India’s Growth Concern
• Significance of Private Investment for Sustained Growth
• Private Sector’s Investment Share Continues to Decline Despite Policy Push
• Private Sector Apathy Poses Risk to India’s Growth Model

Declining Investment Share in GDP Highlights India’s Growth Concern

• India’s GDP is driven mainly by two components — private consumption, which contributes around 60%, and investment spending, which enhances the economy’s productive capacity.
• Investment spending includes private businesses building factories, government infrastructure projects, and household asset creation like housing or livestock purchases. Together, these are termed Gross Fixed Capital Formation (GFCF).
• Data over the last two decades shows a steady decline in GFCF’s contribution to GDP since 2011–12.
• Notably, investment has remained below 30% of GDP through most years since 2014, indicating that India’s growth is being driven more by consumption than by capacity-building investments — a trend that worries policymakers.

Significance of Private Investment for Sustained Growth

• While the government has been working to boost private consumption through tax reliefs, direct cash transfers, and GST cuts, this is only a means to an end — the real goal is to trigger private investment.
• Higher consumer demand is expected to encourage businesses to expand, build new factories, and invest in capacity creation.
• To support this, the government has increased public spending on infrastructure — roads, ports, and power — hoping to “crowd in” private investment.
• A thriving private investment environment reduces the burden on government spending. It aligns with the vision of “Minimum Government, Maximum Governance.”
• Finance Minister Nirmala Sitharaman recently urged industry leaders to overcome their hesitation, noting that the government has delivered on reforms and now expects the private sector to lead growth by investing and expanding production.

Private Sector’s Investment Share Continues to Decline Despite Policy Push

• Investment data in India, divided among the government, households, and private sector firms, reveals a clear trend — private businesses are reducing their share of new investments.
• Since 2019–20, when the government cut corporate tax rates to encourage private investment, the private sector’s contribution to total fixed asset formation has steadily fallen.
• The latest available data (up to March 2024) shows this decline continuing, even as overall GDP grew by 12% in FY24.
• During this period, the government’s share in total investments rose, while private sector and household shares dropped, indicating that recent growth has been driven largely by public spending, not private enterprise.
• Given that overall investment share has fallen further in FY25, it is unlikely that private sector participation has improved, reinforcing concerns about its continued hesitation to invest despite fiscal and policy incentives.

Private Sector Apathy Poses Risk to India’s Growth Model

• Despite strong GDP growth, corporate tax cuts, income tax reliefs, and PLI subsidies, the private sector remains reluctant to invest in fresh projects.
• This persistent investment slowdown raises concerns on two fronts:
  • it threatens India’s long-term growth prospects; and
  • undermines the government’s development strategy, which envisions the private sector as the primary engine of job creation and economic expansion.
• With businesses holding back, the burden of driving growth continues to fall on the government, limiting progress on tackling unemployment and inequality — two of India’s most pressing challenges.