Exports can be a powerful driver of investment and economic growth

The Indian economy is projected to grow 7.4 per cent this financial year at constant prices, compared to 6.5 per cent in 2024-25. One of the underlying themes of the Indian economy, particularly after the pandemic waned, has been sustained higher capital expenditure by the government. Besides supporting the post-pandemic economic recovery, the idea was that higher government capital expenditure and rapid physical infrastructure building would crowd in private investment. Private investment has remained tepid for several years, but it is essential for sustaining higher economic growth over the medium to long term. As an analysis in this newspaper showed on Tuesday, there are initial signs of a pickup in the pace of private-sector investment.

 

A study of over 700 listed companies — excluding banks, financial services, insurance, and oil & gas companies — showed that their combined fixed assets increased by 13.1 per cent, year-on-year, in the first half of this financial year (April-September 2025), the fastest pace in six years. The increase in private-sector investment was substantially higher once companies in the oil & gas sector were included. The Economic Survey had also highlighted signs of a pickup in private investment. At a macro level, it underscored that the share of gross fixed capital formation (GFCF) in gross domestic product was at 30.5 per cent in the first half of 2025-26, compared to the pre-pandemic average of 28.6 per cent. However, to sustain higher economic growth, GFCF will need to substantially increase.

 

Private investment has been constrained by several factors over the years. Both banking and corporate balance sheets were severely strained in the years following the 2008 global financial crisis, partly due to excessive investment and lax lending standards. It took many years to address this twin balance-sheet problem. Both bank and corporate balance sheets are now in excellent shape. The pandemic also dampened confidence for a few years and affected private investment. Among other big reasons affecting investment decisions were the uncertainty on global trade and excess capacity in China. Recent trade agreements with the European Union and the United States, among others, have brought a degree of certainty. However, the risks associated with Chinese overcapacity remain. China will continue pushing goods into global markets, including India, and this could weigh on investment decisions. Capacity utilisation is hovering around 75 per cent, but in the current environment, companies may prefer to see it rise further before investing in a big way.

 

While there are initial signs of an increase in private investment, the stepup needs to be supported. The government has taken several reform measures in recent months. It will be critical that the momentum continues. Government committees are working on deregulation possibilities, and progress on this front will be a significant determinant of private investment over the medium term. Further, while India has shown openness to trade in recent months, efforts need to go much beyond select trade agreements. It must be recalled that exports or external demand can be a big driver of investment and growth. This will require substantial improvement in the Customs regime and duties.  Therefore, how the recent acceleration in private investment is supported will be critical in determining India’s growth path over the medium term.