After declining to a three-year low in FY24, the private sector investment is expected to fall further in the current financial year, India Ratings said in a research note.
The investments in the private sector are likely to plummet to below 11 per cent of the GDP in FY25, based on the trends from the latest national accounts data and company fillings, it noted.
In FY24, the private sector investments stood at 11.2 per cent of GDP, lower than the pre-Covid (FY16-FY20) average of 11.8 per cent.
The investment rate, measured in proportion of gross capital formation (GCF) to GDP, had languished at 29.9 per cent from FY16 to FY20.
The rating agency attributed this to difficulties faced in the implementation of projects, high non-performing assets in the banking sector, and a weakening domestic/external demand, among other issues.
“This further slumped to a two-decadal low of 27.5 per cent in FY21 due to Covid-19.
"Afterwards, the investment rate had been on an improving front during FY22-FY23.
"However, it moderated to 32 per cent in FY24 and is expected to decline to 31.1 per cent in FY25 as per the second advance estimates,” the rating agency noted.
The Economic Survey for 2023-24 said that to achieve the developed nation target by 2047, India needs to grow at a growth rate of 8 per cent plus on a sustained basis for two decades, requiring an investment rate of at least 35 per cent, with the private sector chipping in a leading way.
“However, this looks challenging given the elevated geopolitical risks stemming from renewed tariff wars which may keep investment decisions of private players in a cautious mode, along with the falling savings rate of households (who are the key financers in the economy for investments),” the agency noted.
The sectoral composition of the overall investment rate in FY24 shows that the slowdown was due to services (decline of 20 basis points to 19.3 per cent) and industrial sectors (decline of 10bps to 10.1 per cent).
The decline in FY24 for the services sector was largely due to ‘trade, repair & hotels, restaurants’ and real estate services.
“It seems that the high pent-up demand in both these segments which had led to a higher investment has tapered off now.
"The investment rate in the real estate services sector remains lower than the pre-Covid (FY16-FY20) average of 6.6 per cent,” said Paras Jasrai, senior economic analyst, India Ratings.
Nevertheless, there were some sub-sectors where the investment push was strong namely ‘transport’, ‘storage’, ‘communication’, ‘public administration & defence,’ and other services. (which include education, health, and new-age services)
Within the industrial sector, mining and electricity were the leading drivers in FY24.
The investment rate in the construction sector stood at 2.6 per cent, although lower, remains at elevated levels (FY16-FY20: 1.9 per cent).
Manufacturing, the largest sector within the industry, has witnessed greater emphasis from the government, with the production-linked Incentive schemes in leading segments since FY21.
However, the investment rate in the sector had been declining in the past few years.
It stood at a three-year low of 5 per cent in FY24.
“It appears that the weak domestic and external demand has led to the decline in investment rate in the manufacturing sector.
"The broad-based investment recovery may take place once the demand is sustained and growing,” it added.
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