Why Indian Capital Needs to Invest Domestically?

Syllabus: GS3/Economy

Context

• The ongoing global economic uncertainty, marked by protectionist measures and trade distortions demands a shift toward an inclusive economic system—one that prioritizes public welfare alongside private capital interests.

About the Indian Capital Investment: Rethinking Growth and Demand

• Economic growth relies on expanding supply with robust and inclusive demand. Historically, three processes shaped the global capitalist system:
  • The creation of a wage-labour class;
  • Productivity gains from industrial mass production; and,
  • Rising demand through income growth.
• In the modern and globalized world, aggregate demand has both domestic and external components.
  • India’s focus needs to turn inward — stimulating domestic demand through investment, fair wage growth, and innovation-driven productivity, with exports under pressure from global uncertainties.

Need of Domestic Investment

• Reviving Private Investment: Indian private investment has stagnated, despite record-high profits.
  • Between FY20 and FY25, public capital expenditure grew at a robust CAGR of 25%, while private investment lagged behind.
  • Domestic firms accounted for 94% of private sector investment announcements in the first half of FY26, up from 77% in 2018–19.
  • Indian outward FDI grew at a CAGR of 12.6% — higher than domestic investment growth — indicating capital’s preference for foreign markets.
• Ensuring Moderate Wage Growth: The Economic Survey 2024–25 highlighted a widening gap between corporate profits and wages.
  • While profits reached a 15-year high, wage growth stagnated, weakening purchasing power and suppressing domestic demand.
  • Moreover, the increasing contractualisation of formal sector jobs has diluted workers’ bargaining power.
• Strengthening Research and Development (R&D): India’s gross R&D expenditure stands at 0.64% of GDP, with only 36% contributed by the private sector—far below global benchmarks where businesses drive over 70% of R&D spending.
• Declining Trend of FDI: Net FDI inflows have sharply declined—from $84.8 billion in FY 2021–22 to just $0.4 billion retained in FY 2024–25 after repatriations;
  • Disinvestments surged by 51% in FY 2023–24 and rose again in FY 2024–25;
  • Short-term profit-seeking behavior has replaced long-term strategic commitments;
• Demand-Side Weakness: Weak consumer sentiment and uneven post-pandemic recovery have dampened domestic consumption.
• Regulatory and Policy Bottlenecks: Issues like land acquisition delays, complex tax structures, and inconsistent enforcement of regulations continue to deter investment.

Why Does Domestic Investment Matters?

• Stimulating Demand: Domestic capital can fuel internal consumption, creating a virtuous cycle of growth.
• Job Creation: Investment in manufacturing and services directly translates to employment opportunities.
• Resilience Against Global Shocks: With FDI showing signs of retreat, domestic capital can anchor stability.
• Confidence Signaling: When Indian firms invest at home, it sends a strong message to global investors about the country’s prospects.
• Domestic investment offers several advantages:
  • Stability: Less prone to sudden withdrawals;
  • Alignment With National Priorities: More likely to invest in infrastructure, manufacturing, and employment-generating sectors;
  • Multiplier Effect: Stimulates local demand and entrepreneurship;

Government Initiatives to Bridge the Gap

• Make in India: Promotes manufacturing and innovation;
• Production-Linked Incentives (PLI): Encourages domestic production in key sectors;
• Ease of Doing Business reforms: Simplifies compliance and reduces red tape;
• Invest India: A facilitation platform for investors  
• Special Assistance to States for Capital Investment 2023–24 Scheme allocated ₹1.3 lakh crore in interest-free loans to states for infrastructure projects in health, education, transport, and water supply.
  • Public capital expenditure surged from ₹3.4 lakh crore in FY20 to ₹10.2 lakh crore projected for FY25—a compound annual growth rate of 25%.

Road Ahead  

• Indian capital needs to evolve — beyond profit maximization — prioritizing national development over narrow profit motives. It means:
  • Investing in underserved regions;
  • Supporting innovation and startups;
  • Partnering with government initiatives;
  • Prioritizing long-term national interest over short-term returns;
• Inclusivity, innovation, and domestic reinvestment should define the new phase of capitalism that can help India achieve a $30 trillion economy by 2047.

Source: TH