For years, policymakers have grappled with the question of why India’s private sector has been hesitant for investments in new industries and infrastructure. Despite India achieving high economic growth rates, private investment as a share of GDP has been on a decline since the 2007 global financial crisis.
Although investment activity saw a brief revival in 2022 and 2023, recent data from a top credit rating agency shows that private sector expenditure within India’s overall investment landscape has once again dropped to a decade-low of 33% this financial year.
An analysis by ICRA, covering 4,500 listed and 8,000 unlisted companies, highlights that while listed firms have slowed their investments, unlisted companies have actually cut back. Concerns over dwindling private investments have been raised by economists for years, with banking leader Uday Kotak recently cautioning against a decline in India’s entrepreneurial “animal spirits.” He urged business heirs to focus on creating new ventures rather than merely managing inherited wealth.
Further data from Value Research supports this concern, revealing that non-financial businesses in India are holding cash worth 11% of their total assets, indicating reluctance to make fresh investments.
Several factors have contributed to this trend, including weak urban consumption, subdued export demand, and an influx of cheap Chinese imports in certain sectors. According to ICRA’s Chief Rating Officer K. Ravichandran, these challenges have stalled capacity expansion plans for Indian businesses.
Beyond these immediate concerns, India’s Economic Survey has pointed out that global uncertainties and existing overcapacity have dampened private investment sentiment. This slowdown has direct implications for economic growth, as corporate investments in assets such as factories, machinery, and construction—collectively known as gross fixed capital formation—account for about 30% of India’s GDP, making them the second-largest contributor after private consumption.
With India’s GDP growth projected to slow to 6.5% this year from 9.2% last year due to weaker consumption, revitalizing private sector investment is critical. Experts emphasize that unless this happens, achieving long-term growth targets will be difficult. The World Bank estimates that India needs an average growth rate of 7.8% over the next 22 years to reach high-income status by 2047. To facilitate this, private and public investments must increase from the current 33% to at least 40% of GDP.
The government has taken several steps to stimulate private investment, including ramping up infrastructure spending, cutting corporate tax rates from 30% to 22%, and introducing production-linked incentives worth billions of dollars. Additionally, credit availability has improved, and regulatory restrictions have been significantly eased.
However, these measures have yet to drive corporate India toward higher capital expenditure. JP Morgan India’s Chief Economist Sajjid Chinoy argues that weak demand is the primary deterrent. While corporate profitability has surged to a 15-year high, a lack of consumer purchasing power—exacerbated by wage stagnation—has hindered demand for goods and services, reducing the incentive for businesses to expand.
Former Prime Minister’s Economic Advisory Council (PMEAC) member Rathin Roy believes that deeper structural issues are at play. Entrepreneurs, he suggests, are not innovating enough to create new demand. The construction sector exemplifies this, with unsold housing inventory in urban areas and developers struggling to tap into tier-two and tier-three markets.
Moreover, Roy echoes Kotak’s concern about the rising trend of business heirs prioritizing wealth management over enterprise-building. During the COVID-19 pandemic, many companies realized they could generate profits through financial investments without expanding their operations. Consequently, a significant portion of Indian capital is being invested abroad rather than in domestic business ventures.
Despite these challenges, there are indications that private investment could pick up. ICRA notes that recent interest rate cuts and a $12 billion income tax relief in the federal budget could boost domestic consumption. The Reserve Bank of India has also reported a rise in investment intentions among private companies this year.
However, global trade uncertainties, particularly tariffs imposed by the U.S., could still delay any significant recovery in private sector spending. Whether corporate India translates its intent into actual investment remains to be seen.
