Do we need greater investment? Let’s go by capital efficiency analysis.

livemint.com:

During the past decade (2013-14 to 2022-23), India’s annual total investments have ranged between 30% and 34% of GDP, barring a dip to 28% of GDP in 2020-21. This is if we measure this proportion using current prices or nominal data (let us refer to it as the ‘nominal investment ratio’). Usually, all ratios— investment, savings, fiscal deficit, current account balance, corporate profits, et al—are measured in nominal data or at current prices.

However, there is a growing debate that one should be more focused on the real investments-to-real GDP ratio (the ‘real investment ratio’), rather than the nominal investment ratio. What is the difference between these two ratios? What should we be looking at and what are the key implications? A comparison of the two ratios in India reveals an interesting fact. The real investment ratio has been higher than the nominal investment ratio every year since 2012-13 and has remained between 34% and 37% of GDP during the past decade, except for 32% of GDP in 2020-21.

What makes the debate very pertinent is that while the nominal investment ratio stood at about 32% of GDP each in 2021-22 and 2022-23, down from 39% of GDP in 2011-12, the real investment ratio was 36.7% of GDP in 2021-22 and 35% of GDP in 2022-23. It is important to put these two data points in an appropriate context as the latter suggests that the decline in India’s investment ratio is not very significant. So the entire debate calling for a higher investment ratio may be misplaced.

First, we need to understand the importance of the nominal and real investment ratios. When do we consider the former and when is the latter used? Usually, when an entity invests, it is done in nominal terms. Every rupee invested (at current