Private sector capital expenditure in India fell to a three-year low of 11.2% of GDP in the fiscal year 2024, according to a recent report by India Ratings.
This figure is notably below the pre-COVID-19 average of 11.8% observed from fiscal years 2016 to 2020. The report highlights that weak investment sentiments among private sector players contributed significantly to this decline.
Analysts predict that this downward trend is likely to continue into fiscal year 2025, with private sector investments potentially dropping below 11% of GDP. The overall investment rate for FY25 has also been projected to decrease to 31.1%, as indicated by the second advance estimates for the year.
The Economic Survey 2025 has outlined that for India to achieve its target of becoming a developed nation by 2047, an investment rate of at least 35% is crucial, with the private sector playing a pivotal role. However, this target appears challenging given the current geopolitical risks and declining household savings rates.
The investment landscape during FY16-FY20 stagnated at 29.9% due to various factors, including project implementation difficulties and high non-performing assets in banks. It further dropped to a two-decade low of 27.5% in FY21 due to the pandemic, before moderating to 32% in FY24.
Sectoral analysis reveals that the decline in the overall investment rate in FY24 was driven by the services and industrial sectors. Investments in the services sector decreased by 20 basis points to 19.3%, while the industrial sector experienced a 10 basis point decline to 10.1%. Moreover, the investment rate in these sectors fell from 4.3% and 6.7% in FY23 to 3.1% and 6.2% in FY24, respectively. The sluggish performance in these sectors reflects broader challenges in revitalising private sector investment, which is essential for sustainable economic growth.
The National Statistical Office's data show that the investment decline in FY24 was mainly due to the underperformance of private and household sectors. The private sector's investment rate decreased from 12.3% in FY23 to a three-year low of 11.2% in FY24, while household investment also moderated by 60 basis points to 12.8%. Despite the government's efforts, the overall savings rate remained flat at 30.7% in FY24. Household savings hit a seven-year low of 18.1%, partially due to rising financial liabilities, reaching a 17-year high of 6.2% of GDP. This combination of factors underscores the need for policy interventions to bolster investment and savings rates across sectors to support India's long-term economic ambitions.