Gurugram: 5th March 2025
An analysis conducted by India Ratings and Research (Ind-Ra) on investment data for FY24 has revealed that private sector investments have fallen to a three-year low, accounting for 11.2% of GDP. This figure is below the pre-COVID average of 11.8% observed between FY16 and FY20, reflecting a decline in private sector investment sentiment.
According to Paras Jasrai, Senior Analyst & Economist at Ind-Ra, private sector investments are projected to drop below 11% of GDP in FY25, based on recent trends from national accounts data and corporate filings. The overall investment rate is estimated to decrease to 31.1% in FY25, as indicated by the second advance estimates.
ICRA’s research highlights that the investment rate, defined as the ratio of gross capital formation (GCF) to GDP, stagnated at 29.9% during the FY16-FY20 period due to various challenges, including project implementation difficulties, high levels of non-performing assets in the banking sector, and weakening domestic and external demand. This rate further plummeted to a two-decade low of 27.5% in FY21 as a result of the COVID-19 pandemic. Although there was a recovery in the investment rate during FY22 and FY23, it moderated to 32.0% in FY24.
Data from ICRA indicates that the slowdown in the overall investment rate for FY24 can be attributed to the services and industrial sectors. The investment rate in the services sector decreased by 20 basis points year-on-year to 19.3%, while the industrial sector experienced a decline of 10 basis points year-on-year to 10.1% in FY24.
The downturn in the services sector for FY24 was primarily driven by declines in the ‘trade, repair & hotels, restaurants’ and real estate services segments. The investment rates in these sectors fell to 3.1% and 6.2% in FY24, compared to 4.3% and 6.7% in FY23, respectively. It appears that the previously high pent-up demand in these areas, which had spurred greater investment, has now diminished. Notably, the investment rate in the real estate services sector remains below the pre-COVID average of 6.6% recorded during FY16-FY20.
Institution-wise Investment Rate: The National Statistical Office also provides detailed data for GCF by four main institutions namely households, government, public and private sector. The decline in the investment rate in FY24 emanated from the private and household sectors. The investment rate of the private sector declined to a three-year low of 11.2% in FY24 (FY23: 12.3%). In fact, this was much lower than the pre-COVID (FY16-FY20) average of 11.8%, indicating weak investment sentiments of the private sector. The weak demand conditions seem to have been pulling down the confidence of the private sector to step up capex in a big way. This is worrisome as given the favourable demographic dividend, India needs to generate jobs at a pace which is at least matching the pace of growth of the economy. This would only be possible in the private sector, given the limited employability space in the public sector.
The services sector experienced a downturn in FY24, primarily attributed to the ‘trade, repair & hotels, restaurants’ and real estate services. The investment rates in these areas fell to 3.1% and 6.2% in FY24, compared to 4.3% and 6.7% in FY23, respectively. This decline suggests that the previously high pent-up demand in these segments, which had spurred increased investment, has now diminished. Notably, the investment rate in the real estate services sector remains below the pre-COVID average of 6.6% observed between FY16 and FY20.
Data from the ratings agency indicates that sectors such as ‘transport’, ‘storage’, ‘communication’, ‘public administration & defence’, and other services—including education, health, and new-age services—have reached significant milestones in FY24, with respective highs of 2.3%, 0.1%, 1.5%, 3.1%, and 2.6%.
Government capital expenditure has played a crucial role in enhancing investments in the transport and ‘public administration & defence’ sectors. The surge in demand and the advent of new technologies, such as 5G, have positioned the private sector at the forefront of communication services, while the private and household sectors, which encompass unincorporated firms, have driven growth in other services. The communication sector exhibits a higher degree of private sector involvement, whereas the private and household sectors are predominant in other services, as indicated by the institution-wise data available until FY23.
In the industrial sector, mining and electricity emerged as the primary contributors in FY24. The investment rates in these sectors reached a nine-year high of 0.5% and a four-year high of 2.0%, respectively. Although the investment rate in the construction sector stood at 2.6%, reflecting a year-on-year decline, it remains elevated compared to the FY16-FY20 average of 1.9%, as reported.
Additionally, the report highlights a concerning trend in the manufacturing sector, which has received significant government support through Production-Linked Incentive schemes since FY21, yet recorded a three-year low investment rate of 5.0% in FY24.
