Why have private investments dropped?

Syllabus: GS-III, Subject: Economy, Topic: Growth and Development, Inclusion, Issue: Savings – Types, trends and factors

Context: Private investments, as measured by private Gross Fixed Capital Formation (GFCF) as a percentage of gross domestic product (GDP) is not picking up

Gross Fixed Capital Formation (GCFC):

  • Indicates the growth in the size of fixed capital in an economy, including private and public investment.
  • Fixed capital, such as buildings and machinery, contributes to economic growth by increasing productivity and output.

Reasons for low private investment:

  • Some economists attribute low private investment to low private consumption expenditure, suggesting boosting consumer spending to stimulate investment.
  • However, historical data in India shows an inverse relationship between consumption and investment, suggesting that higher savings and investment come at the cost of lower consumption.
  • Structural problems and policy uncertainty are cited as significant reasons for the decline in private investment.


  • Low private investment could lead to slower economic growth, affecting output.
  • Government investment may compensate for low private investment but can lead to inefficiencies and tax burdens.
+1 advantage for mains (Data point)·          In India, private investment significantly increased after economic reforms in the late 1980s and early 1990s, overtaking public investment.

·          Private investment rose until the global financial crisis of 2007-08, then declined, hitting a low of 19.6% of GDP in 2020-21.

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