Datanomics: Higher investment needed to tread on 8% growth trajectory

India experienced its dream run of economic growth during 2003-10, barring 2008 when external shocks in the form of global financial crisis punctured India's high growth

India’s economy grew at a five-quarter high of 7.8 per cent in the first quarter of the financial year 2025-26 (Q1FY26). Meanwhile, the Standing Committee on Finance (2024-25), in its recent report, pitched for raising the investment rate to 35 per cent from the current 32.6 per cent to achieve a sustained growth path of 8 per cent per annum to realise the vision of ‘Viksit Bharat’ by 2047. In the case of India and China, two countries that started their development trajectory together, evidence shows a positive correlation between higher investment rates and strong real GDP growth.

 

China’s investment rate higher than India’s 

 

India experienced its dream run of economic growth from 2003 to 2010, barring 2008, when the global financial crisis punctured its growth. This period largely coincided with a sustained high level of gross capital formation (as per cent of GDP) from 2004-12. However, India’s investment rate has remained below 35 per cent since 2013, while that of China, never fallen below 40 per cent since 2007.   

 

India more capital-efficient than China in recent years

 

China’s incremental capital-output ratio (ICOR), a metric to measure capital efficiency, was largely below India during the period 1991-2011. However, in the last decade and a half, India’s ICOR has gone below China’s, indicating greater capital efficiency or less capital usage to produce additional output.