The Modi Government must revive the Investment slowdown in India

The investment rate in the country has been declining quite significantly over the last 9 years or so. The gross fixed capital formation (GFCF) rate or investment rate peaked at 34.3% in FY12 and then came down to 28.6% in FY18 before registering a marginal post-pandemic recovery to 31.2 % in 2021. Thus, instead of going above 34.3% in 2012, it stood below 31.2 % in 2021.

Banerjee et al. (2015) find that corporate investment has weakened, despite lower interest rates and widely unrestricted capital market funding, primarily due to the mismatch between favorable investment opportunities, financial conditions, and uncertainty about future economic conditions at the global level.

Kose et al. (2017) suggest that factors, including terms-of-trade shocks for oil exporters and commodity importers; slowing foreign direct investment inflows; and increasing political risks, rising private debt burdens are responsible for the slowing down of investment in emerging countries like India. Besides these, financial market and macroeconomic policy uncertainties have also adversely affected the investment rate.

This way, the debate around the investment slowdown in India needs more clarity to understand the role of economic factors to suggest policy options for reviving the investment.

The downshift of credit flow to the private sector—which also gets reflected in the adverse credit gap, lack of access to debt through bond markets, and rising debt payment—has impacted the investment adversely in the economy. Thus, private corporate investment in India has suffered from the problem of twin balance sheets. There is a need to focus significantly on private investment, including the corporate sector.

As monitored, the corporate sector is gradually operating the bonds and capital market. Still, there is a need to have further competitive financing options, including the bonds and mutual funds market, to fill the rising credit gap and provide access to funds at reasonable prices. There is much scope to gradually increase equity financing in banks with the practical implementation of the bad banks approach to reduce financial distress and allow space for higher channelization of credit to potential firms.