India’s Private Investments May Drop Below 11% of GDP
To achieve the developed nation target by 2047, India needs to grow at a rate of over 8 per cent on a sustained basis for two decades. This would require an overall investment rate of at least 35 per cent, with the private sector chipping in a leading way
Chennai: With India Inc becoming cautious about investments amidst global uncertainties emerging from the tariff war, private sector investments are likely to fall below 11 per cent of the GDP this fiscal.
During the pre-Covid period of FY16-FY20, private investment -GDP ratio stood at an average of 11.8 per cent. After falling to a decadal low of 10 per cent in Covid-hit FY21, private sector investments had moved up to 12.3 per cent in FY23, but had fallen back to 11.2 per cent in FY24.
Based on the trends from the latest national accounts data and company fillings, private investments are likely to fall below 11 per cent, finds India Ratings. This will also see overall investments or the share of gross capital formation in the GDP will decline to 31.1 per cent in FY25 from 32 per cent in FY24.
To achieve the developed nation target by 2047, India needs to grow at a rate of over 8 per cent on a sustained basis for two decades. This would require an overall investment rate of at least 35 per cent, with the private sector chipping in a leading way.
The geopolitical risks stemming from the tariff wars may keep investment decisions of private players in a cautious mode. As per Ind Ra estimates, if reciprocal tariffs are imposed by the US as reported, India’s exports to the US may decline anywhere between $2 billion to $7 billion in FY26.
In FY24, the slowdown in overall investment rate was due to services and industrial sectors. The decline in FY24 for the services sector was largely due to trade, repair, hotels, restaurants and real estate services.
Nevertheless, some sub-sectors where the investment push was strong namely transport, storage, communication, public administration and defence as well as education, health and new age services.
Within the industrial sector, mining and electricity sectors were leading drivers in FY24. Manufacturing, the largest sector within industry, has witnessed a greater emphasis from the government with the Production-linked Incentive schemes in leading segments since FY21. However, the investment rate of the sector had been declining in the past few years. It stood at a three-year low of 5 per cent in FY24.
The proportion of gross capital formation to GDP, had languished at 29.9 per cent during FY16-FY20 due to reasons, including difficulties faced in the implementation of projects, high non-performing assets in the banking sector, a weakening domestic and external demand. This further slumped to a two-decadal low of 27.5 per cent in FY21 due to COVID-19. However, since then the investment rate has been improving in FY22 and FY23 and it moderated to 32 per cent in FY24.
