Prioritizing private investment is essential

- India is also above average in terms of investment rate, though below the high of 36-37 percent achieved in the 2000s.

During the boom period of the 2000s, India's growth was driven by private sector investment. Globally, gross fixed capital formation has averaged between 23 and 27 percent over the past five decades. Countries that have performed strongly in the growth sector, such as China, have consistently been above this average. China achieved 45 percent gross fixed capital formation in 2013. Even today it is more than 40 percent.

India has also been above average in terms of investment rate. Today it is between 29 and 30 percent, although it is down from the highs of 36-37 percent achieved in the 2000s. This decline is usually because private investment has declined and therefore restoring the rate of private investment in the economy should be a policy priority.

However, it seems that efforts in this direction, including improving banks' balance sheets and improving ease of doing business, have not yielded the desired results.

A recently released report shows that investment by Indian businesses has declined for two consecutive quarters. In fact, in the first quarter of the current financial year itself, between April-June 2023, it has declined by more than 6 percent year-on-year. This is overall bad news as the government is running out of options to improve investment. In addition to the above reform measures, the government has also tried to improve its investment. This process has partially offset private sector investment.

Capital expenditure of large public sector undertakings (PSUs) has reached 42.5 per cent of their annual budget. And they were under pressure to reach 90 percent by the end of this year. Road and rail network in India is being expanded and upgraded with the help of such public expenditure. The work is being done by Highway Construction Authority of India and Indian Railways. In the following two years, the share of capital expenditure in the Union budget increased at the rate of one-third every year, with a large share going to the railways.

Certainly, upgrading and expanding the country's infrastructure network is an important goal of public funding. But the government sector alone cannot bear the entire burden of investment. In terms of capital allocation, private sector capital investment proves to be more economical.

Moreover, it is also becoming clear that this level of public spending is not suitable for the government exchequer. Tax revenues are not growing fast enough to justify such spending. In fact, direct tax collections have declined by 0.9 percent in the first four months of the current financial year. High levels of public debt and the government's modest budget deficit will constrain the government's ability to make capital expenditures. which may also affect growth outcomes in the medium term. Getting private investment on track should be the top policy priority of the government.