Domestic Private Investment: An Opportunity for a vibrant corporate bond market

India’s economic growth over the last couple of years has shown remarkable resilience towards external shocks. However, a key issue that has puzzled policy makers and academics is the relatively low levels of private investment in the economy. For high levels of growth to sustain in the long-term, it is imperative that the private sector invests to expand its production capacity. This is important as the government cannot continue to meet investment requirements of a developing economy on account of several fiscal and political constraints.

As demonstrated in Figure 1, from 2011-2016 the share of Private Sector Fixed Capital formation (or Private Investment) in the GDP has been declining. This decline is a cause for concern as India’s growth has been led by public investments over the last four years. Moreover, fiscal constraints restrict the public sector’s ability to invest in the economy. This resulted in people questioning the long-term growth prospects of the Indian economy. Long-term growth requires investment in the economy. It is therefore imperative that private sector investment as a share of GDP increases. Figure 1 also shows that post 2016, private sector investment is on a rebound. Notwithstanding that, there is a need to evaluate whether this increase in investment can be sustained over a period of time or if it is just a temporary blip.

Figure No. 1: Share of Private Sector (As a percentage of GDP) in Gross Fixed Capital Formation

Source: World Bank

A key factor worth noting is that despite low domestic investment, foreign direct investment (FDI) in the economy has been at a record high. HighFDI levels and robust growth recorded by India in recent times demonstrate that India remains an attractive investment destination. This implies that there is enough scope for domestic investors to invest in the Indian economy.