India’s growth path is being shaped by recovering consumption, robust public investment, and the possibility of a private capex revival. Real Private Final Consumption Expenditure (PFCE) has bounced back to its pre-pandemic trajectory, averaging 6.7% in FY23–25, aided by rural demand recovery, softer inflation, and GST rationalisation. Real Gross Fixed Capital Formation (GFCF) growth has averaged 8.1% in the same period, mainly driven by government capex. Importantly, capital spending has become more productive, with the Incremental Capital Output Ratio (ICOR) improving to 4.4 from 4.8 pre-pandemic. Sustaining these gains, however, depends critically on stronger private sector investment. Despite record corporate cash reserves, private capex remains muted amid cautious leverage, uncertain demand, and global risks. Unlocking private investment, alongside supportive credit, rising consumption, and productivity-focused reforms, is key to achieving a credible 8–8.2% real GDP growth potential.

  • Improving Capex Efficacy: India’s ICOR has improved in the last three fiscals, averaging 4.4 compared with the 10-year pre-pandemic average of 4.8 (FY10–FY19). This betterment suggests that the economy is generating more output for each unit of investment than in the earlier decade. If the recent improvement in capital efficiency can be sustained and further strengthened, the pathway to a high-growth trajectory (potential GDP) of approx. 8% becomes more credible. Achieving this, however, will require reinforcing the post-Covid efficiency gains through productivity-enhancing reforms, stronger domestic demand, and most importantly, a revival in private investment.
  • The Missing Piece: Private Capex Revival: Corporate balance sheets are healthier than ever, with BSE500 (ex-BFSI) firms holding ₹10.35 trillion in FY25, more than double FY19 levels. Yet, private capex remains sluggish, with new project announcements falling in FY24–25. Companies remain cautious due to weak demand, global uncertainty, and policy unpredictability. Much of the cash is being returned to shareholders rather than reinvested. For India to sustain high growth, this liquidity must be channelled into productive investments. History (FY05–08) shows that robust private capex enabled ~8% GDP growth with an ICOR of just 3.2–3.8, even at lower investment-to-GDP ratios (25–28%).
  • Lower ICOR is the path to 8% Potential GDP Growth: If rising consumption and accommodative credit conditions trigger a private capex revival, ICOR could fall further to ~4.3. Alongside an increase in GFCF’s share of GDP from 34% to 35%, this would lift India’s potential GDP growth to ~8.1%, compared to the current 7.7%.