What really explains this problem despite incremental reforms since 1991? The problem is often seen as an issue within the sectorPrefer HTon GoogleReuters fileIndia does not have an investment problem; it has an investment in manufacturing problemThat investment kickstarts future growth is a well-accepted fact in economics. China is the best example of this in the recent past. In fact, many economists accuse China of suppressing domestic consumption to boost investment. India has been battling a laggard private investment climate for the last decade or so. While this story is well known, a sectoral reading of the situation provides a crucial insight. India has not done badly regarding the overall investment rate in the economy. This shows in the share of Gross Capital Formation (GCF) in GDP.
However, what has become a bigger problem is the marginalization of manufacturing in the overall investment being made in the Indian economy. Comparing overall GCF and manufacturing GCF in GDP shows this clearly. While a long-term comparison of these two variables requires clubbing data from various GDP series, which often entail breaks from previous trends, it is the only way to do this comparison.Manufacturing’s supply side crisis of investment shows in big industry’s falling demand in bank creditSector-wise allocation of bank credit data supports the supply side story of falling manufacturing investment in the Indian economy. In 2007-08, the earliest period for which this data is available, bank credit to large industry was 12.6% of GDP. This increased consistently to reach about 18% by the early 2010s. It fell steadily thereafter, reaching lower than its 2007-08 levels by 2019-20 and further to 8.6% by 2025-26. Credit to micro, small and medium industries, however, does not show a similar trend and has largely remained steady.
