How long the private sector capital formation and investment is lagging in INDIA and when it is expected to expedite?

Private sector capital formation in India has been lagging since the global financial crisis of 2007–08, with the trend becoming more pronounced from 2011–12. While the investment rate peaked at around 27% of GDP in 2007–08, it dropped significantly, reaching a low of 19.6% in 2020–21.

Recent data from 2025 shows cautious signs of a turnaround, with some projections indicating an upturn. The complete and sustained revival is still expected to take some time.

Duration of the lag

The slowdown in private investment can be traced back to the post-2008 period and persisted for over a decade.

Peak and Decline (2007–2012): Private investment peaked around 2007–08 and declined steadily from 2011–12, following the previous investment cycle.

Government-driven growth (2014 onwards): After 2014, overall investment stayed below 30% of GDP. Growth during this period was primarily fueled by government spending and private consumption, rather than private capital investment.

Post-pandemic slump (2020–2021): Private investment fell further during the COVID-19 pandemic, hitting a low of 19.6% of GDP in 2020–21.

Persistent weak sentiment (2024–2025): Despite recent high GDP growth rates and government incentives like corporate tax cuts, private businesses have remained hesitant to invest significantly in fresh projects.

Factors contributing to the delay

Multiple factors have prolonged the lag in private investment:

Weak consumption and demand: The accelerator theory of investment states that investments are dependent on demand. After the global financial crisis, and especially since the pandemic, weak consumer demand, particularly among the rural and middle classes, has dampened business confidence.

Balance sheet problems: Following the credit boom of the mid-2000s, both corporations and banks faced stressed balance sheets and high non-performing assets (NPAs). This led companies to focus on deleveraging, while banks were cautious about disbursing credit.

Policy uncertainty: Investors are wary of shifting government policies and require stability for long-term projects. Concerns over policy stability have contributed to the prolonged slump in private investment.

Global headwinds: Lingering global economic uncertainty, geopolitical tensions, and supply chain disruptions have led businesses to adopt a cautious "wait-and-see" approach.

Projections for expediting investment

While a definitive timeline is hard to predict, recent reports indicate a potential acceleration, though with a degree of caution.

2025-26 outlook: A forward-looking survey on private sector capital expenditure (capex) shows firms' intentions for 2025–26, though some caution is noted. The Reserve Bank of India (RBI) has also noted that private capex is expected to grow by 21.5% in 2025–26.

Gradual pickup: Analysts suggest it may take up to two years for a more definite and sustained picture to emerge, with investment expected to gradually pick up across sectors.

Manufacturing boost: Some data indicates that the manufacturing sector is leading the recovery, with investment intentions rising by 40% for 2025–26.

Public investment foundation: Large-scale government capital expenditure on infrastructure is a key factor, as it is expected to "crowd in" private investment by providing the necessary support infrastructure. However, the impact of public spending is often lagged.

In summary, while the private investment slowdown has been a concern for over a decade, recent indicators suggest a revival is on the horizon. The timing, however, depends on strengthening consumer demand, maintaining policy stability, and resolving global economic uncertainties.