Importance of Domestic Investment in India

Source: The post “Importance of Domestic Investment in India ” has been created, based “Why Indian capital needs to invest domestically” published in “The Hindu” on 8 October 2025. Importance of Domestic Investment in India.

UPSC Syllabus: GS-3- Investment Models

Context: As the global economy enters a prolonged phase of uncertainty, marked by tariff barriers, trade wars, and geopolitical realignments, India faces the challenge of sustaining its growth momentum. At such a juncture, domestic investment by Indian capital becomes essential to reduce dependence on volatile global demand and to ensure that economic growth remains broad-based, inclusive, and employment-generating.

The Evolution of Indian Capital

• Indian capitalism has historically evolved alongside state policy.
  • Pre-liberalisation (1950–1990): The state dominated capital formation through PSUs.
  • Post-liberalisation (1991 onwards): Private Indian capital expanded rapidly under market-friendly reforms and global integration.
• However, much of this private investment was globally oriented, aimed at export markets or speculative sectors rather than domestic productive capacity.
• The current situation demands that Indian capital reorient itself to serve internal economic needs a process akin to the earlier structural transformations in capitalism worldwide.

Why Domestic Investment Is Crucial Now

1. Global Uncertainty and External Demand Weakness:
   1. Rising protectionism and tariff disputes have disrupted global value chains.
   2. Export-led growth is now less reliable; India’s economy must depend on domestic consumption and internal investment to sustain demand.
   3. Vulnerability to external shocks, such as commodity price fluctuations and trade restrictions, highlights the need for a resilient domestic growth model.
2. Stimulating Demand and Employment
   1. India faces high unemployment and low wage growth, particularly in the informal and rural sectors.
   2. Domestic investment in manufacturing, services, and infrastructure can boost employment and create multiplier effects across sectors.
   3. Inclusive growth requires private capital to expand beyond profit motives and engage in nation-building investments.
3. Complementing Public Investment: The government has significantly increased public capital expenditure:
   1. From ₹4.26 lakh crore in FY20 to ₹10.21 lakh crore in FY25 (CAGR ~19%).
   2. Focus areas include roads, railways, energy, and digital infrastructure. However, private investment remains subdued due to risk aversion and preference for quick returns.
   3. Without private participation, the multiplier impact of public expenditure remains limited.
4. Encouraging Structural Transformation
   1. Indian capital must focus on productive and employment-intensive sectors — manufacturing, green energy, logistics, defence, and research.
   2. Such reallocation would strengthen the industrial base, reduce import dependence, and enhance competitiveness.
5. Long-term Stability and Self-Reliance
   1. Reinvesting domestically aligns with the goals of Atmanirbhar Bharat and Make in India, fostering innovation and resilience.
   2. It reduces exposure to external shocks and speculative international capital flows.

Challenges to Domestic Investment

1. Short-termism: Many private investors prioritise quick speculative gains over long-term industrial projects.
2. Policy and Regulatory Delays: Complex clearances and tax uncertainties discourage risk-taking.
3. Financial Constraints: Rising cost of capital and weak corporate balance sheets post-COVID have limited reinvestment capacity.
4. Unequal Risk Sharing: Businesses often expect state incentives but hesitate to invest without guaranteed profits.

Policy Imperatives and the Way Forward

1. Strengthen Public–Private Synergy: Encourage collaboration in infrastructure, technology, and R&D through PPP models.
2. Stable Policy Environment: Predictable taxation, faster approvals, and consistent industrial policies to restore confidence.
3. Reform Corporate Incentives: Link incentives to domestic reinvestment and job creation rather than mere profit reporting.
4. Promote Domestic Demand: Enhance rural income, urban consumption, and MSME competitiveness to sustain market demand.
5. Foster a Developmental Ethos: Private business must align with public interest, mirroring earlier developmental capitalism seen in East Asia.

Conclusion: India’s next phase of growth must be driven from within. While the government has expanded public spending, private Indian capital must shoulder its share of responsibility by reinvesting profits domestically, building industries, and generating employment. In an era of fragile globalisation, aligning private interests with national priorities is not only patriotic but economically prudent. The future of Indian growth depends on a partnership between the state and domestic capital that prioritises resilience, inclusion, and long-term development over short-term profit.

Question: Why does Indian capital need to invest domestically? Discuss in light of global uncertainties and India’s growth requirements.