Investment Slowdown: Worry For North Bloc’s Economic Czars

India’s investment rate in the third quarter of the current financial year was 30.5 per cent of the gross domestic product (GDP) — a three-year low — compared to 34.7 per cent in the second quarter and 32.8 per cent in the first.

A slowdown in investment means future growth may well be jeopardised, putting brakes on the economy.

“The investment-to-GDP ratio needs to be pushed to over 40 per cent,” Rajiv Kumar, the Chairman of Pahle India Foundation and former Vice-Chairman of NITI Aayog told The Secretariat. “The government must look at ways to draw more private sector investment. There are serious limitations to public expenditure-led growth, and it is unsustainable,” Kumar said.  

Even in the third quarter of the previous financial year, the investment rate had stood at 31.6 per cent of GDP. “The weakness in investment is from both sides – government as well as private- but frankly investment cannot be propped up only by state-led expenditure. Private investment has to be pulled in,” said a top Finance Ministry official.

The slowing investment rate has become a cause for worry for India’s economic czars, even as India’s GDP growth rate of 6.2 per cent for the October-December quarter, driven by healthy consumption, brought much relief and cheer to the policymakers. 

The highest investment rate was recorded in September 2011, when it touched an all-time high of 41.2 per cent. The lowest ever was during Covid, when investment fell to a record low of 21.8 per cent in June 2020.

Finance Minister Nirmala Sitharaman, presenting her eighth Union Budget in February, noted that investment was one of the four engines that the government would focus on to achieve the Viksit Bharat status by 2047.

Tax Cut Fails To Bring Investment Cheer

Despite Sitharaman’s announcement to reduce the corporate tax rate from 30 per cent to 22 per cent in 2019 to boost private investments, India Inc. has, by and large, shied away from any big-ticket investments.

Growth in real investments measured in terms of gross fixed capital formation (GFCF) slowed to 5.7 per cent in the Q3 of 2024-25, compared to 9.3 per cent in the Q3 of the previous financial year. Government expenditure, which increased significantly in the previous financial year, too, has been lower in FY 2025.

According to Crisil, the share of private corporate investment in the GDP fell to 10.1 per cent in the previous financial year, from 11.3 per cent in 2022-23, indicating that the private sector capex has not risen sufficiently. “This is worrisome because fiscal consolidation will require some restraint in government capex growth,” it said.

A Turnaround In Private Investment?

There is a silver lining, though. A report released by Deloitte in January this year noted that “private investments are likely to turn around soon”. It said that a rebound in government capex spending will pull in private investments.

The government has gone on record stating that infrastructure-related ministries would chart a three-year pipeline of projects in public-private partnership (PPP) mode. It has also provided an outlay of Rs 1.5 lakh crore for 50-year interest-free loans to states for capital expenditure and reform incentives.

Consumption has shown a healthy increase. According to the Second Advance Estimate, real GDP is projected to grow 6.5 per cent in FY25, led by a three-year high growth of 7.6 per cent in private consumption.

“Rising consumption is eventually expected to spur investments. With the host of measures announced in this year's Budget, we are quite hopeful that more companies will enter India or even expand existing manufacturing facilities,” the official said, adding that global risks and uncertainties pose added challenges.

On the back of consumption, India is now aiming to grow by 6.5 per cent in 2024-25, up from 6.4 per cent projected in the First Advance Estimate.

Crisil added that investment growth hinges on a sustained pick-up in private corporate investment, as the government normalises capex to meet its fiscal deficit target for the next year.

Liquidity Crunch Needs To Be Addressed

Private investments have been falling for over a decade now. Importantly, the ongoing liquidity crunch in the system could further impact investments. The liquidity situation has remained tight amid tax outflows, forex market intervention, and volatility in capital flows.

The worst impacted is the crucial micro, small, and medium enterprises (MSME) sector, which contributes the most to creating new jobs.

The Reserve Bank of India (RBI) has been taking several steps to ease the liquidity situation. However, the situation may remain tight for the next few months. The State Bank of India, in a report, has said that “more liquidity measures could be required on a sustained basis.”

How does one improve the liquidity in the banking system? One, of course, has to bring in fresh deposits into banks, which can come about only if interest rates are raised. Raising deposit rates is like a Catch-22 situation. Lending rates, too, have to go up then, which in turn means there would be fewer takers for loans.

Another way is for the government to subsidise certain kinds of investment loans. To do so, the government would have to make expenditure sacrifices somewhere else. Which again is a difficult choice for any government to make. 

While the liquidity issue needs to be urgently resolved, India must further ease and simplify its investment processes, especially if it has to compete with other economies such as Vietnam.