PRIVATE GROSS FIXED
CAPITAL FORMATION - ECONOMY
News: Why have private investments
dropped?
What's in the news?
●
The failure of private investment, as measured by
private Gross Fixed Capital Formation (GFCF) as a percentage of gross domestic
product (GDP) at current prices, to pick up pace has been one of the major
issues plaguing the Indian economy.
Key takeaways:
●
Private investment witnessed a steady decline since 2011-12 and the government has been hoping that large Indian corporations would
step in and ramp up investment.
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In fact, in 2019,
the Centre slashed corporate taxes from 30% to 22% hoping that the move
would encourage private investment.
Reasons for Decreasing
Private Investments:
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Many economists in India have blamed low private consumption expenditure as
the primary reason behind the failure of private investment to pick up over the
last decade, and particularly since the onset of the pandemic.
●
Other economists believe that structural problems may likely be the core reason behind the
significant fall in private investment as a percentage of GDP over the last
decade or so.
●
They also voiced out that the policy uncertainty can discourage private investment as investors
expect stability to carry out risky long-term projects.
Gross Fixed Capital
Formation (GFCF):
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GFCF refers to the growth in the size of fixed capital in an economy.
○
Fixed assets/capital are tangible or intangible assets produced as outputs from production
processes that are used repeatedly, or continuously, for more than one year.
GFCF Consists of:
●
GFCF consists of resident producers' investments, deducting disposals, in fixed assets
during a given period.
●
It also includes certain additions to the value of
non-produced assets realized by producers or institutional units.
Private and Government
Investments in GFCF:
●
Private GFCF can serve as a rough indicator of how
much the private sector in an economy is willing to invest.
●
Overall GFCF also includes capital formation as a
result of investment by the government.
Significance of GFCF:
●
GFCF helps in creation of fixed capital that helps
to boost economic growth and improve
living standards.
●
Fixed capital largely determines the overall output
of an economy.
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Developed economies such as the U.S. possess more fixed capital per capita
than developing economies such as India.
●
GFCF helping workers produce a greater amount of
goods and services each year, helps to boost economic growth and improve living
standards.
Upward Trends in GFCF:
●
GFCF in the Indian economy increased significantly
from INR 32.78 lakh crore in 2014-15 to INR 54.35 lakh crore in 2022-2023.
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This surge in capital formation reflects substantial investments in infrastructure,
industry, and public goods.
Trends in Private
Investment in India:
●
In India, private investment began to pick up significantly
mostly after the economic reforms of the late 1980s and the early 1990s that
improved private sector confidence.
●
From independence to economic liberalisation,
private investment largely remained either slightly below or above 10% of the
GDP.
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The growth in private investment lasted until the
global financial crisis of 2007-08. It rose from around 10% of GDP in the 1980s
to around 27% in 2007-08.
●
From 2011-12 onwards, however, private investment
began to drop and hit a low of 19.6% of the GDP in 2020-21.
Trends in Public
Investment in India:
●
Public investment as a percentage of GDP, on the
other hand, steadily rose over the decades from less than 3% of GDP in 1950-51
to overtake private investment as a percentage of GDP in the early 1980s.
●
Public investment began to drop post-liberalisation with private investment taking on the leading role in fixed capital
formation.