Capital Expenditure and Private Investment in India

The Union government has significantly increased its capital expenditure following the pandemic, rising from 1.67% of GDP in 2019-20 to 3.4% in 2024-25. This was meant to boost demand during recovery, with the expectation that private investment would eventually take the lead to sustain growth.

Challenges in Private Investment

• Despite a sharp recovery from the pandemic, private investment remains sluggish, a trend that dates back to before Covid-19.
• The "twin balance sheet problem" post-global financial crisis stressed corporate and bank balance sheets, a problem now resolved.
• India's gross fixed capital formation is projected at 33.4% of GDP this year, but needs to increase for sustained growth.
• Prime Minister Modi has encouraged Indian companies to actively pursue global opportunities.

Government Initiatives

• The government has cut over 42,000 compliances and decriminalized 3,700 legal provisions since 2014.
• Discussion is ongoing regarding a Deregulation Commission to streamline investment processes.

Barriers to Investment

• Capacity utilization in manufacturing is at 75%, slightly above the long-term average, yet firms hesitate to invest due to:
• The uncertain global economic environment, particularly after Donald Trump's return as U.S. President.
• Overcapacity in China, which restricts export potential.

Export Performance and Economic Growth

• India's high-growth phase in the 2000s coincided with export growth, with exports as a share of GDP rising from 15% in 2003 to over 25% in 2013.
• The share fell to 18.7% in 2019 and has yet to return to its peak, affecting overall investment and growth.
• The government is easing duties to enhance export performance but acknowledges more needs to be done.