As India prepares for the upcoming Union Budget, the economy presents a picture of robust growth tempered by a critical imbalance. While headline numbers appear strong, a deeper look reveals that the engine of private capital expenditure (capex) is sputtering, leaving the public sector to shoulder an unsustainable burden.
The Capex Imbalance: Public Sector Carries the Load
The macro-economic indicators ahead of the budget seem promising. The economy grew at 6.5% in 2024-25, and public capital expenditure soared past ₹11 trillion, marking its highest share of GDP in 15 years. Inflation has also remained largely within the Reserve Bank of India's comfort zone.
However, this stability hides a troubling divergence. Private sector investment has failed to match the pace expected at India's current stage of development. Despite strong corporate balance sheets and ample liquidity, businesses are exhibiting caution towards long-term commitments. Data from rating agency ICRA highlights this trend: the share of joint-stock companies in India's Gross Fixed Capital Formation (GFCF) fell to a decadal low of about 33% in 2023-24, down from an average of 35% over the past ten years.
Where is the Investment Coming From?
The investment landscape reveals a stark contrast. While listed private firms have increased capex, their contribution remains limited—accounting for just 16% of private capex and 5% of overall GFCF. The unlisted firms, which form the backbone of manufacturing and employment, have largely stayed out of the current investment cycle.
Interestingly, the household sector now drives over 40% of GFCF, fueled by investments in real estate and unorganized ventures. This indicates that the issue is not a shortage of savings, but a deficit of confidence. Corporations evaluating long-gestation industrial projects are drawing conservative conclusions about risk and return.
Fresh private capex intentions for 2025-26 have moderated to ₹4.89 trillion from ₹6.56 trillion in the previous year, as per the statistics ministry. The Reserve Bank of India projects a 21.5% rise in private corporate capex for 2025-26, but this is concentrated in sectors like power, renewables, and transport—areas closely linked to public investment and regulatory certainty.
The Confidence Conundrum and the Path Forward
The painstaking repair of corporate and bank balance sheets over the past decade has led to risk containment rather than a bold investment surge. Global uncertainty plays a role, but domestic policy risk is equally significant. Firms struggle to form stable expectations on taxes, trade policy, and regulations over the 10-15 year lifespan of typical industrial projects.
The proliferation of Quality Control Orders (QCOs) exemplifies the challenge. Their number has skyrocketed from 88 in 2019 to 765, with nearly half covering critical intermediate goods. While aimed at improving standards, their rapid implementation has created certification delays and compliance costs, particularly burdensome for small enterprises. Combined with frequent tariff changes and ad-hoc tax interventions, such moves make investment outcomes hard to forecast.
This makes the upcoming budget critically important. With the new Income Tax Act of 2025 set to take effect in April, the budget must embed tax predictability as a structural public good. Key steps could include:
- A rationalized and unified capital gains tax regime.
- Inflation-indexed personal income tax thresholds for higher earners.
- A credible medium-term commitment on corporate surcharge rates.
These measures would lower uncertainty over post-tax returns and cut the policy risk premium essential for long-term capital formation.
Another structural hurdle is the persistent credit gap of ₹20-25 trillion faced by small firms, coupled with liquidity stress from delayed payments—including from government entities. To revive broad-based private capex, the budget must treat payment discipline as a core reform. Strictly enforcing the 45-day payment rule for government procurements, backed by mandatory disclosure and automatic penalties, would be more impactful than credit subsidies. Credit-guarantee schemes should also shift focus from working capital to supporting term investments for small businesses.
The fiscal reality is tightening. If the central government aims to reduce its debt to 50% of GDP by 2030-31, it cannot sustain the current pace of public capex indefinitely. The sustainability of India's investment ratio, therefore, hinges on private capital stepping into the space that public investment will eventually vacate.
India does not lack investment opportunities; it lacks the assurance that projects will move from conception to completion without friction, delay, and policy drift. Until that confidence is restored, private capital formation will remain misaligned with the nation's long-term growth ambitions.
