Reform agenda: What India must do to get private sector investment going

Subscribe to enjoy similar stories. India has emerged as the world’s fastest-growing major economy. Its macroeconomic fundamentals are sound, corporate balance sheets have strengthened and the health of its financial sector has improved.

Despite these promising trends, private investment growth has not taken off and India’s share of global foreign direct investment (FDI) inflows has fallen. To be fair, private investment in India has been solid compared to peer countries, at about 23% of gross domestic product (GDP). But investment in machinery and equipment, critical for expanding India’s productive capacity, has remained sluggish.

Perhaps more importantly, India’s private sector capital stock sits at a mere one-third of the average emerging market, when adjusted for population size. Building it is crucial for India’s economic development. As our recent International Monetary Fund (IMF) country report argues, to achieve its vision of becoming Viksit Bharat, India needs to re-energize private investment through trade integration and structural reforms to unleash India’s vast entrepreneurial talent.

While the corporate sector is financially healthier than before and rising public investment has helped narrow India’s infrastructure deficit, the handover from public to private investment has not yet happened. In fact, firms remain cautious about committing to large-scale investments. But what’s keeping private investment in India from taking off? This million-dollar question has been debated extensively, with the answer involving, in part, that firms foresee insufficient demand, discouraging them from expanding, even as supply-side factors such as regulatory and financing hurdles remain impediments.