Indian Capital Needs to Refocus on Domestic Investment

Context

Experts believe that maintaining sustained economic growth in India amid growing global uncertainties will now primarily depend on strengthening domestic demand, job creation, and innovation. This requires Indian private capital to focus on domestic investment.

The Emerging Role of Indian Capital

• From independence until the liberalization era of 1991, Indian private capital played a significant role in the country's economic progress.
• After liberalization, Indian companies expanded into global markets and acquired international assets to compete internationally.
• However, global markets are no longer as profitable as they once were. Rising geopolitical tensions, trade disruptions, and declining export demand are requiring Indian capital to redirect its focus from the global to the domestic market.
• To fulfill India's ambition of becoming a $10 trillion economy by 2036, a special focus on domestic investment is essential.

Need to Refocus on Domestic Investment

• Today, India's growth is primarily driven by public investment, while private sector capital expenditure has declined.
• Government capital expenditure increased from ₹3.4 lakh crore in FY2020 to ₹10.2 lakh crore in FY2025, an annual increase of 25%.
• Despite this, private investment as a share of GDP remains stagnant, hovering around 22-23%.
• In contrast, Indian companies have rapidly increased their foreign direct investment (FDI), growing at a rate of over 12% over the past five years, while global FDI has declined. This reflects a tendency to seek opportunities in foreign markets rather than investing in India.
• Given global economic fragmentation, India's strong domestic infrastructure, demographic dividend, and policy stability, domestic reinvestment can be seen as a viable and strategic option.

Strengthening the Domestic Economic Base

1. Promoting Inclusive Growth through Wage Expansion
   • Corporate profits in India are at a 15-year high, but real wage growth remains stagnant. The imbalance between profits and wages has impacted domestic demand.
   •  Real wages are projected to grow by only 6.5% in FY2026, even though productivity and profits are rising.
   • Reforms, especially in the manufacturing, textile, and services sectors, are essential to ensure job creation and stable wage growth.
   • Higher wages boost domestic demand, creating a positive cycle of consumption and investment, which is essential for India amid a global trade slowdown.
2. Promoting Private Investment and Innovation
   • Private investment has historically played a key role in India's industrialization. However, in recent years, investment has become cautious due to risk aversion, corporate debt defaults, and global uncertainties.
   • The current policy environment is particularly positive:
     • The corporate tax rate has been reduced to 22% (15% for new manufacturing companies).
     • The Production-Linked Incentive (PLI) scheme covers 14 sectors, offering incentives worth ₹1.97 lakh crore.
     • Significant improvements have been made in logistics, digital infrastructure, and ease of doing business.
   • Indian companies can now capitalize on these opportunities by increasing domestic capital expenditure in emerging sectors such as green energy, semiconductors, electric mobility, and digital technologies.
3. Strengthening the Innovation Ecosystem
   • India's research and development (R&D) expenditure is only 0.64% of GDP, compared to 2-3% in countries like the United States, Japan, and South Korea.
   • The private sector contributes approximately 36% of India's total R&D expenditure, compared to over 70% in developed countries.
   • To remain competitive in emerging sectors, Indian companies will need to increase their R&D investments in manufacturing, artificial intelligence, biotechnology, and green technologies.
   • The success of South Korea and China demonstrates that private innovation, supported by economic policy, can transform a developing economy into a high-tech manufacturing hub.

Aligning Private Capital with National Priorities

• India's long-term growth will depend on how well private capital aligns with national economic objectives.
• The government has already laid the groundwork through infrastructure upgrades, fiscal discipline, and investment-friendly reforms.
• Now, the private sector must:
  • Reinvest in domestic manufacturing and innovation instead of foreign acquisitions.
  • Partner with public programs such as the National Infrastructure Pipeline and Green Transition initiatives.
  • Decentralization requires investing in emerging states and Tier-2 cities.

The Way Forward

• India's economy is at a critical juncture. With steady GDP growth of over 7%, strong foreign exchange reserves, and rising infrastructure investment, the country is well positioned for economic recovery.
• However, to maintain this momentum, domestic private investment will need to accelerate and complement public spending.
• Focusing on domestic markets will not only reduce vulnerability to external shocks but also promote self-reliance, employment, and innovation.