Private-investment conundrum

Policy intervention will improve prospects

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The Union government has increased capital expenditure after the pandemic-induced disruption. Aside from supporting demand during the recovery phase, the implicit assumption was that, at some point, the investment baton would be passed on to the private sector, which will sustain growth. The Union government's capital expenditure increased from 1.67 per cent of gross domestic product (GDP) in 2019-20 to 3.4 per cent in 2024-25. Although the recovery from the pandemic was sharp — partly driven by statistical effects — revival in private investment has remained tepid. It is worth noting that the weakness in private investment goes back to pre-Covid days.

The state of investment in the pre-pandemic years can be partly explained by what was termed the "twin balance sheet problem". Both corporate and bank balance sheets came under significant stress in the years after the global financial crisis. The problem has since been fully resolved and the balance sheets of both corporations and banks are in good shape. However, the private sector is still unwilling to invest in a big way.