Investment Rate in India: Why It Fell and How to Revive It

Every factory that gets built, every highway that gets laid, and every machine that a business buys adds to a country’s stock of capital. This process of building new productive capacity is called investment, technically measured as gross capital formation (GCF). The investment rate, expressed as GCF’s share of GDP, is one of the most important engines of long-term economic growth. When investment is high, the economy adds capacity, creates jobs, and sets the stage for future output. When it falls, the economy slowly loses momentum. Over the last decade, India’s investment rate dropped from a peak of about 38% to roughly 27% of GDP, and the biggest culprit behind this decline was the pullback in private corporate investment.

Why Investment Collapsed: The Structural Causes

Several forces came together to drag India’s investment rate down. Understanding each of them matters, because reviving investment requires addressing all of them, not just one or two.

• The 2008 global financial crisis : The worldwide financial meltdown disrupted investment decisions across economies. Many countries, including India, are still dealing with its aftereffects. When global demand contracted and financial markets froze, businesses everywhere became cautious about committing capital to new projects.

• The twin balance sheet problem (from 2012 onwards) : This is perhaps the most important domestic reason. On one side, companies that had taken on large loans for infrastructure and industrial projects saw those projects stall. Their balance sheets turned weak. On the other side, the banks that had lent to these companies saw their loans turn into non-performing assets (NPAs), which are loans where borrowers have stopped making repayments. With stressed balance sheets on both sides, companies could not invest and banks could not lend. Credit off-take (the amount of new borrowing from banks) declined sharply.

• High interest rates during 2010-13 : Inflation was running high in this period, which forced the Reserve Bank of India to keep interest rates elevated. Borrowing became expensive, and many businesses chose to delay or cancel their investment plans. Even after inflation came down, investor confidence did not bounce back quickly. The damage to sentiment lingered.

• Litigation in PPP projects : Public-private partnership (PPP) projects, especially in infrastructure, ran into legal disputes. Lengthy court proceedings and regulatory uncertainty made investors wary of putting money into new PPP ventures.

• Unfavourable perception of risk and returns : Perhaps the most telling example is retrospective taxation, where tax rules were changed and applied to past transactions. Laws like these create a deep sense of uncertainty. If the government can change the rules after the fact, businesses cannot calculate their expected returns with any confidence, and that discourages investment.

• Underinvestment in technology and logistics : Not enough resources were allocated toward improving technological capabilities and logistics networks. Without modern logistics and technology, the cost of doing business stays high, and new investments become less attractive.

• Slow land and labour reforms : Acquiring land for industrial projects remained difficult, and labour regulations stayed rigid. Both of these are basic prerequisites for large-scale manufacturing and infrastructure investment.

• Falling household savings and investment : It was not just the corporate sector. Household savings and investment rates were also declining, which reduced the pool of domestic capital available for the economy.

The Reform Agenda: Clearing the Path for Investment Revival

Recognising the severity of the problem, policymakers identified a set of changes needed to reverse the investment decline:

• Quick recognition and resolution of NPAs : The first step to fixing the twin balance sheet problem was to honestly acknowledge how large the bad loan burden was. Banks needed to clean up their books rather than hide the problem through restructuring tricks.

• Recapitalisation of public sector banks (PSBs) : With their capital eroded by NPAs, public sector banks needed fresh capital injections from the government. Without adequate capital, these banks simply could not resume lending at the scale the economy needed.

• Time-bound insolvency resolution through the IBC : The Insolvency and Bankruptcy Code (IBC) was designed to ensure that sick companies and stalled projects were resolved within fixed deadlines. Before the IBC, insolvency cases dragged on for years, locking up capital that could have been redeployed productively.

• Improving GST implementation : The Goods and Services Tax was a landmark reform, but its rollout faced capacity constraints. Building institutional capacity at both central and state levels and adopting fixed deadlines for further changes in the GST programme were identified as essential.

• Speedy land and labour reforms : Further improvements in the ease of doing business required faster reform of land acquisition processes and labour regulations. Alongside this, a predictable and stable taxation regime was necessary to give investors a clearer basis for decision-making.

• Scaling up public investment in infrastructure : Government spending on roads, railways, ports, and other infrastructure serves a dual purpose. It creates employment directly, and it also crowds in (attracts) private investment by improving the economic environment.

• New investment models like HAM : The Hybrid Annuity Model (HAM) was introduced to make infrastructure projects more appealing to private investors. Under HAM, the government shares a portion of the financial risk, reducing the upfront capital burden on the private partner. This was designed to revive private participation in highway and infrastructure projects.

• Renegotiation of stalled PPP projects : Rather than letting troubled PPP projects sit in legal limbo, the recommendation was to renegotiate contract terms based on current ground realities. This would rebuild confidence among private investors who had become disillusioned with the PPP framework.

Pushing Investment to 36% of GDP: The Economic Survey’s Roadmap

The Economic Survey went further and laid out a specific target: raise the rate of investment (gross fixed capital formation as a share of GDP) from about 29% to approximately 36%. Achieving this would require action on multiple fronts simultaneously.

Raising Public Resources

India needed to increase its tax-GDP ratio to at least 22% by 2022-23. The GST was expected to contribute positively to this goal by widening the tax base. In parallel, both corporate tax and personal income tax needed rationalisation to reduce rates while broadening the base. A critical step was reducing the compliance burden on taxpayers and eliminating direct face-to-face interaction between taxpayers and tax officials by using technology-driven processes.

States had a role to play as well. Greater mobilisation of state-level taxes, especially property tax, and better administration of GST at the state level would add to the resource pool.

Where to Direct Higher Public Investment

Two areas stood out as capable of absorbing large increases in public investment:

• Housing, especially in urban areas : Investment in housing generates very large multiplier effects (a chain reaction where each rupee spent creates additional economic activity through wages, material purchases, and demand for services). Urban housing investment was identified as a particularly powerful growth driver.

• Infrastructure through renewed PPP mechanisms : Private investment in infrastructure needed to be encouraged through a revamped public-private partnership model, based on the recommendations of the Kelkar Committee. The Committee had proposed reforms to make PPP contracts more balanced and less risky for private partners.

Opening Up to Foreign Capital

The government was advised to consider further liberalising FDI norms across sectors. Domestic savings could be supplemented by attracting foreign investment into bonds and government securities, providing a fresh source of long-term capital.

Exiting Non-Strategic Public Enterprises

The government should continue to exit central public sector enterprises (CPSEs) that are not strategic in nature. Selling stakes in non-essential government companies would release capital that could be redirected to productive public investment.

The Export and Manufacturing Push: Competing Globally

Investment alone is not enough. For India’s economy to grow sustainably, the goods and services it produces must find buyers in global markets. This requires a concerted effort to make Indian exports and manufacturing globally competitive.

Making Logistics Efficient

A focused effort was needed to improve the efficiency of India’s logistics sector. High logistics costs, estimated to be significantly above the global average, eat into the competitiveness of Indian goods. Faster, cheaper, and more reliable movement of goods from factory to port to customer would make a real difference.

Rationalising Power Tariffs

Industrial power tariffs in India tend to be high because they cross-subsidise cheaper electricity for agricultural and residential consumers. Rationalising power tariff structures was essential to ensure that Indian industries can compete on cost with manufacturers in countries where industrial power is cheaper.

Combining Protection with Productivity

Import tariffs that aim to protect domestic industry are a double-edged sword. They give local firms breathing room, but without accompanying measures to raise productivity, these firms never develop the ability to compete globally. The recommendation was clear: any tariff protection must come paired with productivity improvement measures so that the protection serves as a springboard, not a permanent crutch.

Completing Announced Infrastructure Projects

Rather than announcing new projects, the priority was to accelerate the completion of those already underway. Two projects were specifically highlighted: the Delhi-Mumbai Industrial Corridor (DMIC) and the Dedicated Freight Corridors. Both are transformative in scale and would significantly improve connectivity between manufacturing hubs and export gateways.

Labour and Land Flexibility

Working with states to ease labour and land regulations was identified as essential. In particular, introducing flexibility in labour provisions across different sectors would allow industries to scale up without running into rigid employment rules that do not account for sectoral differences.

Strengthening Services Exports

The government established a dedicated fund of INR 5,000 crore to enhance 12 Champion Services Sectors. These included IT and ITeS (IT-enabled Services), tourism, medical value travel (patients from other countries coming to India for treatment), and audio visual services, among others. The idea was to give targeted support to service sectors where India already has a competitive edge.

Reforming Export Promotion Councils

Export Promotion Councils (EPCs) were to be strengthened by improving their governance and technical capabilities. The key change: subjecting them to well-defined, performance-based evaluation rather than letting them function as bureaucratic bodies with little accountability for actual export outcomes.

Deeper Regional Economic Integration

India was encouraged to explore closer economic integration within South Asia and with the emerging economies of South-East Asia. Leveraging geographic proximity and growing consumer markets in these regions could open new trade corridors for Indian goods and services.

The Bigger Picture: Building a Stable Environment for Capital

Initiatives like Make in India, reforms for quicker approvals and clearances, FDI liberalisation, and strengthening the bond market for long-term financing were all steps in the right direction. But the overarching lesson is straightforward: in the long run, what matters most for reviving and sustaining investment is a clear, transparent, and stable tax and regulatory environment. Businesses invest where they can predict the rules. When the rules keep changing or are applied retroactively, capital goes elsewhere. Building that predictability is the foundation on which everything else rests.