Despite the presumed success of the various PLI schemes and the other government push for investments by the private sector, the same remains a sad story with private capex falling to a three-year low of 11.2% in FY24, which is in fact lower than the pre-Covid average of 11.8% in the previous four years, says a report.
An analysis of the institution-wise investment data for FY24 reveals that private sector investments declined to a three-year low of 11.2% of GDP, which in fact, is lower than the pre-Covid average of 11.8% between fiscals 2016 and 2020, indicating weak investment sentiments of the private sector, India Ratings said in a note Wednesday.
And Paras Jasrai, a senior analyst & economist with the agency, believes that private sector investments are likely to decline to below 11% of GDP in FY25, based on the trends from the latest national accounts data and company fillings. The overall investment rate has declined to 31.1% in FY25 as disclosed in the second advance estimates.
According to the Economic Survey 2025 for the country to reach a developed nation target by 2047, the economy must grow at 8%-plus on a sustained basis for two decades. This requires an investment rate of at least 35%, with the private sector chipping in a leading way. But this looks challenging given the elevated geopolitical risks stemming from renewed tariff wars which may keep investment decisions of private players cautious, along with the falling savings rate of households.
The investment rate, measured by the proportion of gross capital formation to GDP, had languished at 29.9% during FY16-FY20 due to a variety of reasons such as difficulties faced in the implementation of projects, high non-performing assets of banks, a weakening domestic/external demand etc. This further slumped to a two-decadal low of 27.5% in FY21 due to the pandemic. Though post pandemic the investments improved front during FY22-FY23. it moderated to 32% in FY24.
A glance at the sectoral composition indicates that the slowdown in overall investment rate in FY24 was due to services and industrial sectors. While the investments into the services sector declined 20 bps to 19.3%, in the industrial sector it slid 10 bps to 10.1% in FY24. The investment rate in these sectors declined to 3.1% and 6.2% in FY24 from 4.3% and 6.7% in FY23, respectively.
The National Statistical Office has provided detailed data for gross capital formation by households, government, public and private sector and FY24 investment decline was due to the poor show by private and household sectors. While investment rate of the private sector declined to a three-year low of 11.2% in FY24 from 12.3% in FY23, investment by households moderated 60 bps to 12.8% in FY24.
On the other hand, the overall savings rate, which is the nominal gross savings as a proportion of nominal GDP, remained flat at 30.7% in FY24. Barring the government, households, private and public sector saw a moderation in their savings rate. Households savings rate has been on a declining trend after reaching a recent peak of 22.7% in FY21 and fell to a seven-year low of 18.1% in FY24.
Another dampening factor for household savings is the rising financial liabilities, which climbed to a 17-year high of 6.2% of GDP in FY24.