Investment gridlock

After the National Statistics Office (NSO) released GDP estimates for the April-June quarter (Q1), hopes have risen that India may finally be on the cusp of a robust investment cycle. According to the NSO, gross fixed capital formation at constant prices has trended higher for four straight quarters, recording strong year-on-year growth of 11.9% in Q1, albeit on a relatively weak base. Investment accounted for 34.4% of GDP, up from 33.1% in the previous quarter and higher than in the first quarters of any year after the pandemic disruptions. Manufacturing capacity utilisation rose to 77.4% in Q4FY26 from 75.6% in the previous quarter. Capital accumulation through consistently high central government budgetary investment and state governments' newly acquired capacity to fund large projects through reforms-linked soft capex loans appears to have improved the investment climate. While overall public capex has not risen significantly as a fraction of GDP, its composition has changed in recent years, with the Centre taking a larger share and helping improve capital deployment. Supply-side measures such as tax cuts, deregulation, and investment incentives have further strengthened the crowding-in effect. ALSO READ The law and politics of climate reparations A section of Corporate India and investors in electricity, including renewables and nuclear power, digital infrastructure, and high-tech sectors are already investing. Artificial intelligence is also attracting substantial capital. Several listed firms are reporting real sales growth and have ample access to funds. Banks' outstanding industrial credit rose by an average of around 16% in the three quarters through Q1, unprecedented in recent years. Higher domestic production and sustained imports of capital goods and intermediate materials also indicate stronger private capex intentions. According to the Centre for Monitoring Indian Economy, projects worth around Rs 18 lakh crore were announced in Q1, with private companies accounting for a record 86%. However, the recovery remains narrow. Unlisted companies, the informal sector, and conventional employment-intensive industries have limited participation. The value of new manufacturing projects declined sharply in the last two quarters (78% and 41% respectively), after falling in the preceding quarter too. Services have provided the main support, with project values rising 114% and 107% in the last two quarters. Moreover, the number of new projects almost halved in Q1FY27 from a year earlier despite a 53% increase in their value. ALSO READ Don't fight the wrong price war Consumption is holding up, but largely because of strong sales of high-end products rather than mass-market goods. Exporters have shown remarkable resilience and agility in finding new markets, with real growth of 12.1% in Q1 goods and services shipments, despite additional US tariffs and the West Asia conflict. Yet investment appears to be accelerating faster than domestic demand and short-term export prospects would warrant, suggesting that large corporate groups are betting on India's medium- to long-term growth potential. A few investors becoming more confident, however, will not be enough to create a broad and durable investment cycle. Achieving a sustained investment rate of 36-37% — necessary to escape the middle-income trap and support 8-9% growth — requires a wider and longer-lasting capex boom. India remains capital-scarce and faces a draining of domestic savings, making productive foreign direct investment (FDI) crucial. Yet much of the current FDI is risk-averse, involving ownership transfers rather than new productive capacity. Even foreign investments in data centres often involve minority stakes and debt support. To reinforce the investment cycle, policy must address market-power concentration, broaden consumption, and improve the prospects of smaller enterprises. India needs a capex cycle that creates jobs and incomes, not merely one that expands capacity.