Reorienting India’s Private Capital Expenditure

• 11 Oct 2025

Source: TH 

Why in News?

Rising global tariffs  and fluctuating external demand underscore the need to prioritize domestic markets for economic stability, thereby shifting the focus towards Indian private sector capital expenditure (Capex).

Capital Expenditure (Capex)  

• About: It refers to funds spent on acquiring, upgrading, or maintaining physical assets like property, equipment, or technology. It’s a long-term investment recorded as an asset and depreciates over time. Examples include machinery purchases and facility upgrades.  
  • Unlike Operating expenses (Opex), which are the day-to-day costs of running a business, Capex involves substantial investments intended to generate long-term benefits.  
  • The Indian government allocates capex through its annual budget, presented by the Finance Minister.  
  • Capex Expenditure of Rs 11.21 lakh crore (3.1% of GDP) earmarked in FY2025-26.  
• Significance: Capex plays a vital role in economic growth due to its high multiplier effect.  It boosts ancillary industries, creates jobs, and enhances labour productivity.   
  • As a countercyclical fiscal tool, Capex stabilizes the economy and supports long-term revenue generation through asset creation.   
  • It also helps reduce liabilities via loan repayments and catalyses private investment, making it crucial for sustained economic development. 

Evolution of Domestic Capex in India 

• Pre-liberalisation: Businesses thrived under inward-looking policies and protected domestic markets, earning supernormal profits. 
• Post-liberalisation (1990s): Accumulated wealth enabled Indian firms to expand globally, acquire foreign entities, and build multinational operations. 
• Present context: External demand shocks, driven by rising tariff barriers, are prompting closer government-business collaboration to sustain economic growth, as existing public investments and policy reforms fall short. 

What are the Trends in Private Sector Capital Expenditure in India? 

• Overall Growth in Capex: Private sector capital expenditure (capex) increased by 66.3% between FY 2021-22 and FY 2024-25, but is expected to decline by 25.5% in FY 2025-26. 
• Nature of Investments: In FY25, around 49.6% of enterprises invested for income generation, 30.1% for upgradation, and 2.8% for diversification. 
• Sectoral Distribution: The manufacturing sector accounted for the largest share at 43.8%, followed by information and communication at 15.6%, and transportation and storage at 14% 
• Rise in Gross Fixed Assets (GFA): The average Gross Fixed Assets (GFA) per enterprise in the private corporate sector grew by 27.5% between 2022–23 and 2023–24. 

What Role can Domestic Capital Expenditure Play in Sustaining India's Growth? 

• Boosting Private Investment: With India’s outward FDI growing at 12.6% CAGR, far above the global average (3.9%), Indian firms can channel more funds into domestic opportunities to strengthen the home economy. 
  • Indian companies should utilize their record-high corporate profits to expand private investment and capex, aligning with government incentives.  
• Ensuring Moderate Wage Growth: Indian businesses have potential to address stagnant wages despite 15-year-high corporate profits (2023–24) to curb income inequality.  
  • As real wage growth is projected to dip from 7% (FY25) to 6.5% (FY26), companies need to reduce contractualisation and empower workers in formal sectors, especially manufacturing, to sustain a healthy growth cycle. 
• Investing in R&D: Indian firms should raise their Research and development (R&D) expenditure, currently just 0.64% of GDP, compared to China’s 2.1%.  
  • With the private sector contributing only 36% to total R&D—far below the around 70% seen in the US, China, and South Korea—businesses must shift focus from short-term returns to fundamental research, essential for long-term productivity gains.

How can Private Sector Capital Expenditure be Enhanced? 

• Strengthen Institutional Mechanisms and Credit Support: Revamp the Project Monitoring Group (PMG) to ensure faster approvals for large private investments. 
  • Expand the Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs and extend similar support to mid-sized manufacturers. 
  • Utilize the Credit Guarantee Scheme for Startups (CGSS) to encourage early-stage industrial and tech investments. 
• Expand Production Linked Incentive (PLI) Schemes: Introduce PLI schemes for sectors like defense manufacturing and precision engineering. 
  • Improve transparency and timeliness in PLI disbursements to build investor confidence. 
• Improve Tax and Regulatory Framework: Reintroduce or enhance accelerated depreciation benefits for machinery and plant investments. 
  • Fast-track the National Logistics Policy (2022) to reduce logistics costs, enhancing manufacturing competitiveness. 
• De-risk Investments: Promote Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) in sectors like roads, power, and railways to attract private capital and share risks. 

Conclusion 

Sustaining India’s growth momentum requires domestic capital to boost investment, ensure fair wages, and enhance R&D, aligning with national interests for a resilient, self-reliant economy amid global uncertainties.

Drishti Mains Question:

A sustained increase in domestic demand is crucial for India's economic resilience. Analyze the role of Indian businesses in stimulating this demand.

Frequently Asked Questions (FAQs) 

1. Why is there a need to boost domestic private investment in India currently? 
Despite record-high corporate profits and government incentives, private capex remains weak, even as outward FDI grows far faster than the global average. 

2. What is a key challenge in India's Research and Development (R&D) ecosystem? 
India's gross expenditure on R&D is only 0.64% of GDP, and the private sector contribution is merely 36%, far below leading economies, with a focus on short-term returns over fundamental research. 

3. Why is ensuring moderate wage growth important for India’s economy? 
Wage growth sustains consumption and aggregate demand; corporate profits hit a 15-year high in 2023–24, while real wage growth is projected to dip from 7% (FY25) to 6.5% (FY26), risking weaker domestic demand. 

UPSC Civil Services Examination, Previous Year Questions (PYQs)   

Prelims

Q. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if: (2018)

(a) Industrial output fails to keep pace with agricultural output.   

(b) Agricultural output fails to keep pace with industrial output   

(c) Poverty and unemployment increase.   

(d) Imports grow faster than exports.   

Ans: (c)

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Mains

Q. “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product(GDP) in the post-reform period” Give reasons. How far the recent changes in Industrial Policy capable of increasing the industrial growth rate? (2017)