India must significantly raise its investment rate and revitalize private sector participation to achieve faster economic growth, according to prominent economist Surjit Bhalla. Speaking recently, Bhalla, who has also served as Executive Director for India at the International Monetary Fund (IMF), emphasized that the nation's current investment-to-GDP ratio of 28-30% would only sustain a long-term growth rate of approximately 6.5%.
Boosting India's Growth Trajectory
Bhalla asserted that a higher investment rate is a globally proven policy for economic acceleration. He indicated that India would need to elevate its investment-to-GDP ratio to around 34-35% to consistently achieve growth rates of 7% or even 8% in some years. He referenced the period between 2004 and 2013, when India maintained an investment rate of roughly 34%, correlating with higher economic expansion.
The effectiveness of investment also depends on prevailing global economic conditions. Bhalla noted that favorable global environments might allow for higher growth with a lower investment rate. However, given current global uncertainties and potential worsening conditions, he stressed the definitive need to step up the investment rate.
The Crucial Role of Private Investment
While India's overall investment rate has remained relatively high, Bhalla pointed out a critical shift in its composition. Private investment has experienced a notable decline, falling by approximately 5-7 percentage points since the 2011-12 fiscal year. This has led to a larger share of investment coming from the government, particularly in infrastructure projects.
Bhalla highlighted a key distinction between public and private investment. He explained, "Private investment around the world, again, in decade after decade, century after century, has a higher productivity than government investment." While government investment in infrastructure is necessary and can provide an initial economic boost, its returns are generally lower compared to private ventures. For sustained productivity gains and long-term economic sustainability, Bhalla argued, the revival of private investment is indispensable.
The economist concluded that the substantial gap created by the decline in private investment must be addressed to accelerate India's growth rate effectively.