India’s Investment Cycle Is Stirring. Can It Deliver Lasting Growth?

One of the most encouraging data points in the recently-released economic statistics for the first quarter of the current financial year was seen in gross fixed capital formation, or GFCF — a proxy for investment — as a ratio of GDP at current prices at 34.3%. This was a significant jump from 31.4% in the same quarter of 2025-26. The real GFCF growth rate surged from 5.8% in April-June 2025 last year to as high as 11.9%. 

Why this was considered a big boost is because the investment rate has remained somewhat subdued for years. Each time analysts and policymakers talk about ‘green shoots’ in the economy, the next round of data disappoints yet again.

India needs a sustained GDP growth rate of around 8% each year to reach high-income status by 2047. With investments historically contributing about half of India’s growth since 1991, a higher investment ratio can spur GDP growth rate to desired levels over the next two decades.

Historically, the GFCF ratio remained below 30% till 2004-05, after which it rose rapidly to reach almost 36% in 2007-08. This fast rise propelled the GDP growth rate to a new trajectory at the time, but it has not been repeated since then.

Losing steam following the Global Financial Crisis and the Taper Tantrum years, the investment rate once again dropped below 30% in 2015-16 and stayed here for the next six years. This kept GDP pace at around an average annual of 6.6% for the pre-Covid decade.

In the new GDP series at 2022-23 prices, the annual GFCF to GDP ratio stubbornly refused to cross the 32% mark for the three years of 2023-24 to 2025-26.

The last three financial years reveal that the GFCF ratio remains robust in the first half-year, while dissipating in the final two quarters. A peak was hit in the second quarter of 2025-26 at 34.5%, and the just-released data for April-June at 34.3% raises hopes that the desired investment trajectory is within reach.

The government has undertaken various initiatives to prop up the investment rate through its own capital expenditure as well as measures to boost private sector investments such as Production Linked Incentive Scheme, easier regulatory and business environment, and tax cuts.

New project announcements by private companies almost doubled in the first quarter of this year compared to the same time last year, according to CMIE. Investment growth is led by new projects in power generation and services sectors. This comes despite the West Asia conflict situation, high and volatile oil prices, and restricted transport chokepoints.

Similarly, the continued acceleration in the pace of bank credit to industry supports the recent uptrend in private sector investments. RBI data on performance of the private corporate business sector during the first quarter of 2026-27 displayed a peak of 19.4% in sales growth, the highest in the last two years. Growth of operating profits too stepped up for both manufacturing and services sectors.  Sectors such as vehicles, petroleum and electrical machinery on the manufacturing side and, on the services side, IT sector and wholesale and retail trade are performing well.

On the other hand, the Reserve Bank of India capacity utilisation survey for manufacturing firms for the January-March 2025-26 quarter refuses to break away from the 75% post-Covid level, indicating that a surge in fresh investments by the private sector may prove to be challenging in the manufacturing sector.  

So far, the government has been undertaking the heavy lifting in capital expenditure. But with the private sector contributing the bulk of share in the GFCF, its investment activity is key to driving prospective GDP growth. Rising investments in emerging sectors such as semiconductors, data centres and AI need to be replicated in labour-intensive sectors for broad-based income growth.

While early signs in the first quarter indicate an investment uptick, past experience shows that the second half of the year sees a decline in the GFCF ratio. Reaching the peak investment ratio of 36% as in the past will require a benign global business environment and facilitative policies at home. Slower growth in the agricultural sector too might impact consumer demand.

Much will hinge on central bank measures in the coming months, including the US Federal Reserve September action. In essence, it must be concluded that it is not yet time to get excited about the higher investment ratio in the first quarter of the current financial year and to be confident that private sector investment activity is in fact set for an inflection point.