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Source– This post on Gross Fixed Capital Formation is based on the article “Why have private investments dropped?” published in “The Hindu” on 19th April 2024.
Why in the News?
The failure of private investment to pick up pace has been one of the major issues plaguing the Indian economy.
About Gross Fixed Capital Formation
1. GFCF refers to the growth in the size of fixed capital in an economy. Fixed capital require investment for their creation.
2. GFCF serves as a rough indicator of how much the private sector in an economy is willing to invest.
3. GFCF includes capital formation as a result of investment by the government.
4. Why does it matters:
a) GFCF helps in creation of fixed capital that helps to boost economic growth and improve living standards.
b) Fixed capital largely determines the overall output of an economy.
Developed economies such as the U.S. possess more fixed capital per capita than developing economies such as India.
About the trend seen in private investment in India
1) In India, private investment began to pick up significantly mostly after the economic reforms of the late 1980s and the early 1990s that improved private sector confidence.
2) From independence to economic liberalisation, private investment largely remained either slightly below or above 10% of the GDP. Public investment as a percentage of GDP, on the other hand, steadily rose over the decades from less than 3% of GDP in 1950-51 to overtake private investment as a percentage of GDP in the early 1980s.
4) Public investment began to drop post-liberalisation with private investment taking on the leading role in fixed capital formation. The growth in private investment lasted until the global financial crisis of 2007-08. It rose from around 10% of GDP in the 1980s to around 27% in 2007-08.
5) From 2011-12 onwards, however, private investment began to drop and hit a low of 19.6% of the GDP in 2020-21.
UPSC Syllabus: Indian economy
