Why in NEWS
India’s corporate investment remains sluggish despite significant government incentives. The Index of Industrial Production (IIP) growth fell to a nine-month low of 1.2% in June 2025, raising concerns about economic growth and job creation.

Key Terms / Concepts

Term	Explanation
IIP (Index of Industrial Production)	Monthly indicator measuring industrial output trends in manufacturing, mining, and electricity sectors
GFCF (Gross Fixed Capital Formation)	Measures net increase in physical assets (investment) by businesses
Capacity Utilization	Extent to which a firm uses its installed productive capacity
Multiplier Effect	Economic concept where an initial spending leads to increased income and consumption, amplifying overall economic activity
PLI Scheme	Government incentives provided to specific sectors based on incremental output
Viability Gap Funding	Government funding for infrastructure projects that are economically necessary but financially unviable
Price-to-Income Ratio (PTI)	Measures housing affordability; ratio of median home price to annual income

News Summary: Key Points

Factor	Details
Weak Demand	Despite profit rise due to corporate tax cut (30% to 22% in 2019), firms hesitate to invest due to low consumer demand and wage stagnation
RBI Policy Limitations	Interest rate cuts and liquidity infusion failed to lift business confidence without matching demand
Capacity Underutilization	Firms hesitate to invest in new capacity when existing ones remain underused
Falling Investment-to-GDP Ratio	Down to 12% in FY23 from 16% during 2004–08 boom; insufficient for >8% growth target
Low Multiplier of Public Capex	₹11.21 lakh crore Capex in FY26 (3.1% of GDP) but low job creation and long project gestation reduce private sector response
Loan Disbursement Delays	Credit to infra sector grew only 2.1% YoY (Nov 2023); road sector loans slowed too
Global Factors	Global protectionism and tariff barriers lower export-led investment opportunities

Economic Theories: Investment vs Profit

Economist	Viewpoint
Tugan Baranovsky	Investment creates its own demand if capital and consumption goods are balanced
Rosa Luxemburg	Profit does not automatically lead to reinvestment; firms act independently, not collectively
Michał Kalecki	Investment drives profits, but low demand prevents investment; external stimulus is needed to break the cycle

Government Measures to Boost Investment

Initiative	Objective
Make in India, Startup India	Promote innovation and manufacturing
PM GatiShakti	Integrate logistics and infra development
PLI Schemes	Incentivize sectoral production
NICDP	Develop industrial corridors
Ease of Doing Business Reforms	Streamline regulations
NSWS	Single-window investor platform
India Industrial Land Bank	Real-time land availability data
Project Monitoring Group	Fast-track stalled project approvals
FDI Reforms	90%+ FDI via automatic route; open sectors

Suggested Policy Directions

Focus Area	Recommendations
Boost Demand	Increase rural wages via MGNREGA, social schemes, cash transfers
Labour-Intensive Sectors	Prioritize housing and MSME support to increase employment
Factor Market Reforms	Lower land prices via transparent policy; PTI ~11 in cities must reduce
De-risk Private Investment	Viability gap funds, credit guarantee for growth-stage firms
Green & Digital Capex	Incentivize sustainable tech adoption and circular economy
Mission-Linked Investment	Align industry with national missions (defence, EVs, semiconductors)
Confidence Building	Maintain inflation, ensure fiscal transparency, and fast-track infra clearances

In a Nutshell

Memory Code – DRIP-PIG
Demand boost
Reform factor markets
Infrastructure de-risking
Public investment alignment
PLI and green growth
Industrial land & project facilitation
Global export opportunities

Prelims Practice Questions

1. Consider the following statements:
   1. The Production Linked Incentive (PLI) Scheme offers output-based incentives to select sectors.
   2. Gross Fixed Capital Formation (GFCF) reflects changes in inventory levels.
   3. Investment-to-GDP ratio required for 8%+ growth is around 35%.
      Which of the statements are correct?
      a) 1 and 2 only
      b) 1 and 3 only
      c) 2 and 3 only
      d) All of the above
2. Which of the following correctly explains the term “Viability Gap Funding”?
   a) A form of tariff subsidy for exports
   b) Grant support to bridge shortfall in infrastructure project returns
   c) Insurance coverage for PPPs in agriculture
   d) None of the above
3. The concept that “investment drives profit and not the other way around” is attributed to:
   a) Adam Smith
   b) Michał Kalecki
   c) John Hicks
   d) Tugan Baranovsky

Mains Questions

1. Despite strong public capital expenditure and reforms, corporate investment in India remains subdued. Discuss the causes and suggest a roadmap for revival. (UPSC GS3 – Economy)
2. How do economic theories like those of Kalecki and Luxemburg explain the current investment stagnation in India? Apply these theories to critique India’s current investment strategy.

Prelims Answers & Explanations

Qn	Answer	Explanation
1	b) 1 and 3 only	GFCF excludes inventories; PLI is output-linked and 35%+ Inv/GDP needed for high growth
2	b)	VGF is a capital grant for economically essential but financially unviable infra projects
3	b) Michał Kalecki	He emphasized that investment drives profits, especially under demand-deficient conditions