Context
The article discusses why India’s private capital must redirect investment inward at a time when the global economy faces uncertainty due to trade wars, tariff barriers, and declining global demand. It calls for greater synergy between the government and Indian business houses to sustain growth momentum and strengthen domestic self-reliance.
Key Highlights
- The Challenge of Balance
- Policymakers face a dual challenge:
- Harness long-term benefits of global trade.
- Manage short-term disruptions from global economic volatility.
- With declining global investment and fragile external demand, India’s growth must increasingly depend on domestic capital formation and consumption.
- Historical Context
- Since Independence, Indian capital:
- Grew under protectionist regimes with limited foreign competition.
- Accumulated moral profits due to state protection and concessional policies.
- Post-1991 liberalisation allowed Indian firms to expand abroad, creating global linkages and outward FDI.
- However, recent global instability—tariff wars, protectionism, and slowing trade—has made domestic reinvestment more viable than overseas ventures.
- Importance of Domestic Capital Formation
- Domestic private capital plays a critical role in:
- Sustaining investment when global flows are uncertain.
- Supporting domestic demand and employment.
- Three long-term drivers of India’s mass-market economy:
- Wage-based expansion
- Industrial mass production
- Rising domestic demand
- Stimulating these engines now requires coordinated public–private investment.
- Investment Trends
- Public capital expenditure rose from ₹4.34 lakh crore (FY20) to ₹10.21 lakh crore (FY25), growing at a CAGR of 21.6%—mainly in roads, railways, and communications.
- Private capex, however, remains subdued, while outward FDI from India has risen sharply, indicating that Indian firms prefer global expansion over domestic reinvestment.
- The government’s focus must now shift toward stimulating private domestic investment to complement public infrastructure growth.
- Structural Constraints
- The slow pace of private investment is tied to:
- Corporate profit hoarding instead of reinvestment.
- Focus on short-term returns.
- Rising input costs and wage pressures.
- The Economic Survey 2024–25 highlights the risk of profit-wage decoupling—corporate profits rising while wage growth stagnates, depressing aggregate demand.
- R&D and Innovation Deficit
- India spends only 0.64% of GDP on Research and Development (R&D), far below global averages:
- USA, China, Japan, and South Korea spend over 2–3% of GDP.
- In India, government funds 70% of total R&D; private sector contributes just 36%.
- The imbalance indicates low private sector innovation intensity, particularly outside select industries like pharma, IT, and defence.
- Government’s Role
- The state must facilitate investment conditions through:
- Stable policy environment.
- Simplified regulations.
- Efficient infrastructure and logistics.
- But government efforts alone are insufficient—business houses must align profit motives with public interest and reinvest in India’s growth sectors.