Lower income tax, GST and borrowing cost could increase real wages and savings supporting capital expediture.....

 India's private capital formation is showing signs of recovery, primarily driven by strong public sector investment and an improved banking sector, but the direct links between this recovery and specific policy measures like lower income tax, GST, and borrowing costs are complex and often indirect. The key variables at play include government capital expenditure, corporate balance sheet strength, improved bank asset quality, and expected reductions in borrowing costs, alongside consistent GDP growth. Private capital formation is a cornerstone of sustained economic growth, and its revival in India is crucial for long-term development. Following a period of balance sheet adjustments in the private sector, there are now encouraging signs of a recovery in private investment. This recovery is unfolding within an economic environment shaped by significant government initiatives, though the direct impact on real wages and savings through the specific mechanisms of lower income tax, GST reforms, and reduced borrowing costs presents a nuanced picture.

Variables Pointing to a Recovery in India's Private Capital Formation

Several key variables indicate a recovery in private capital formation (Gross Fixed Capital Formation - GFCF in the private sector):

Sustained Public Capital Expenditure (Capex): The government's continued high public investment, which reached a record 8.0% of GDP in FY24, has been instrumental in creating a conducive environment and "crowding in" private investment. This focus on infrastructure (power, roads, etc.) provides demand for private sector goods and services, stimulating their investment.

Improved Corporate Balance Sheets: Indian companies have utilized record-high profits (e.g., in 2023-24) to strengthen their balance sheets, making them more capable of funding future expansion. Non-financial private-sector capital formation expanded vigorously in FY22 and FY23 in current prices.

Better Banking Sector Health: The asset quality of banks has improved significantly, with the Gross Non-Performing Assets (GNPA) ratio of Scheduled Commercial Banks (SCBs) declining to a 12-year low of 2.6% by September 2024. This has enhanced their capacity to lend to the private sector, and credit growth to the private sector is a critical variable for future investment, with growth above 10% of GDP needed for high economic growth.

Positive Investment Intentions: Forward-looking surveys show that private sector capex is projected to increase, with an estimated provisional capital expenditure per enterprise for acquiring new assets in 2024-25 at ₹172.2 crore, indicating plans for capacity expansion.

Impact on Real Wages and Savings

The impact of specific policy measures on real wages and savings concurrently with capital formation is less direct:

Real Wages: Real wage growth is expected to moderate slightly, projected to dip from 7% in FY25 to 6.5% in FY26. While corporate profits are high, ensuring moderate wage growth in formal sectors is crucial for sustaining domestic consumption and a healthy growth cycle. The link to the specified tax policies is indirect, but general economic growth is expected to lead to higher demand for labor and more jobs, which would eventually support wage growth.

Savings: India's saving rate has been a key source of investment funds, with the household sector accounting for over 50% of total savings. The relationship between real interest rates and household savings is complex, but ensuring price stability and low inflation is crucial for augmenting savings.

Role of Tax and Borrowing Cost Policies

Lower Income Tax: While not explicitly mentioned as the primary driver of current private capital formation recovery in recent reports, lower income taxes generally increase disposable income, which can boost household savings and consumption. Increased savings can then be channelled into investment.

GST: The implementation of GST (Goods and Services Tax) has simplified the tax structure, reduced the cascading effect of taxes, and improved logistics efficiency. This has created a single unified market and is expected to boost India's GDP by around 1.0% to 2.0% in the long term by enhancing competitiveness and attracting investment.

Borrowing Cost (Interest Rates): Lower borrowing costs directly reduce the cost of capital for businesses, encouraging private investment. In H1 2025, the Reserve Bank of India initiated a cautious rate cutting cycle, bringing the repo rate to 5.5% by June 2025, creating a more favorable environment for private credit expansion and capital expenditure, especially in infrastructure and real estate.

The recovery in India's private capital formation is a multifaceted phenomenon, primarily driven by a virtuous cycle of sustained government capital expenditure, deleveraged corporate balance sheets, and a healthier banking system. Policy measures like the structural benefits of GST and a declining interest rate curve are acting as key enablers by improving the business environment and reducing capital costs. While direct quantitative links between lower specific taxes and simultaneous increases in real wages and savings are hard to isolate precisely, these factors are contributing to overall economic growth, which in turn drives both capital formation and improved living standards in the long run. The transition to a self-sustaining private investment-led growth model, complemented by moderate real wage growth and stable savings rates, remains the key objective for Indian policymakers.