Introduction
The Indian economy currently presents a fascinating
dichotomy where macroeconomic growth indicators remain robust while the engine
of private sector investment operates below capacity. Over the past five years,
the baton for capital expenditure (CAPEX) has been firmly held by the
government, which has been driving investment to build foundational
infrastructure. This heavy lifting has been necessitated by a prolonged
hesitation in private sector investment, driven by a combination of sluggish
demand, capacity underutilization, and, crucially, high inflation and volatile
price expectations. As India aims for a $5 trillion economy, the reliance on
public spending rather than private enterprise poses significant questions
about the sustainability of its growth model, especially as inflationary
pressures compress corporate margins and create a "wait-and-watch"
mentality among investors.
Why the Government Holds the Baton
The shift towards government-driven investment has
been a strategic response to structural slowdowns in the private sector since
roughly 2012–13. Following the pandemic, the central government intensified
this role to revive economic growth, employing a "crowding-in"
strategy, where public infrastructure investment is intended to create the
necessary conditions to attract private capital. In the 2024–25 Union Budget,
the government continued this trend with a massive capital expenditure
allocation of INR 11.11 lakh crore, representing roughly 3.4% of GDP. This
investment is heavily focused on infrastructure, including roads, railways, and
renewable energy, aimed at boosting productivity and reducing logistics costs
through initiatives like the PM GatiShakti National Master Plan. Furthermore,
the government has used direct incentives to spur manufacturing, notably the
Production Linked Incentive (PLI) schemes with an outlay of over INR 1.97 lakh
crore, aimed at sectors like electronics, pharma, and automobiles. State
governments have also stepped up in certain quarters, with 34.6% growth in
their fresh investments in Q3 FY25, providing a crucial boost to the overall
investment landscape.
Why the Private Sector is Delaying Investment
Despite high corporate profitability in 2024 and
significant corporate tax cuts introduced earlier, the private sector has been
reluctant to initiate large-scale greenfield projects. Data indicates that
private corporate investment has remained stagnant at around 12% of GDP for
over a decade. A primary reason for this, as evidenced by a 1.4% decline in
private investment plans in the third quarter (Q3) of FY 2024-25, is the
perception of weak demand and fears over rising costs. Many companies continue
to operate with capacity utilization below 75-80%, reducing the immediate need
for new plants and machinery. Additionally, firms have preferred to pay down
debt or return capital to shareholders through buybacks rather than investing
in new projects. The lingering impact of high debt levels, or corporate balance
sheet issues, has made firms cautious about long-term debt-funded expansion,
creating a scenario where, despite having cash, they prefer liquidity.
The Role of Inflation and Price Expectations
Inflation and price expectations have played a
critical role in delaying private investment. High inflationary pressures,
particularly in the aftermath of global supply chain disruptions and high
energy costs, have significantly compressed corporate margins. When input
prices rise faster than the selling prices of finished goods, profitability
shrinks, and companies become wary of new investment, fearing they cannot pass
the costs on to consumers in a weak demand environment. Moreover, high food
inflation in India, which has been volatile, can restrain discretionary
spending, further suppressing demand.
Price expectations are crucial; if manufacturers
anticipate that high inflation will continue, they may hesitate to invest in
projects with long gestation periods, as the cost of raw materials and labor
might make the project unviable upon completion. Data shows that even when retail
inflation was showing signs of easing in early 2025 (4.9% from April to
December 2024), input cost fears remained, with 1.4% of private plans being
pulled back in Q3 FY25 due to these concerns. The RBI’s inflation-targeting
framework, which requires keeping inflation within a 2-6% band, means that when
inflation surprises on the upside, it often leads to high interest rates,
making borrowing more expensive for companies, thus acting as a deterrent to
expansion.
Conclusion
The current investment scenario in India is defined by a "paradox of 2025," where strong macroeconomic performance, driven by public investment, has not yet translated into a robust private-sector revival. The government, through massive infrastructure spending and incentives like the PLI scheme, has taken the lead to bolster the economy's productive capacity, but this cannot be a permanent substitute for private investment. The delay by the private sector is not merely due to lack of funds, but to a cautious approach driven by idle capacity, weak demand, and the erosion of margins due to persistent inflationary pressures and uncertain price expectations. While the 2024-25 budget has attempted to create a better environment with the removal of the angel tax and focus on SME credit, the long-term sustainability of India’s 7%+ growth depends on the private sector regaining the confidence to start investing again. Until inflationary pressures are fully anchored and demand improves significantly, the baton for investment is likely to remain in the government's hands.
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