EAC-PM's Call for Higher Investment Rates to Achieve Economic Growth

EAC-PM: Investment Rate Must Rise to Achieve 7% Economic Growth

The Economic Advisory Council to the Prime Minister (EAC-PM) recently stated that for India to achieve a sustained 7% GDP growth rate, the national investment rate must increase from the current 31–32% of GDP to around 34–35%.

Background

The EAC-PM has raised concerns about India’s current investment patterns, noting that private investment remains subdued and the rollout of private sector projects has been slower than expected. Although India’s investment rate stands at 31–32% of GDP, the Council emphasized that increasing it to 34–35% is essential for sustaining long-term high growth.

Historically, no major economy has consistently grown at over 7% for two decades without strong export performance. Therefore, India must strengthen both investment and exports to meet its long-term economic ambitions.

Present Status

Several domestic indicators show potential for a revival in private investment:

• Rising rural and urban demand, improving the investment climate.
• Many firms are now debt-free and cash-rich, providing financial room for fresh investments.
• Government capital expenditure is steadily increasing and generating strong multiplier effects.
• Supportive macroeconomic conditions—including low inflation, RBI rate cuts, CRR reduction, good monsoons, tax reforms, and GST improvements—create a favourable investment environment.

Reasons for Low Private Investment

Global uncertainty has played a significant role in dampening private investment. Rising global instability—including new tariffs (such as the U.S. imposing a 50% tariff on Russian oil), increased protectionism, volatility in foreign investment, and the decline of globalization—has made companies cautious.

Technological transitions in industries like automobiles and IT are also affecting investment decisions. Many firms are adopting a wait-and-watch strategy before committing new capital.

Additionally, India faces a “missing middle” problem in manufacturing:

• Dominance of micro firms with fewer than 10 workers.
• Lack of mid-sized manufacturing firms employing 200–500 workers.

This limits productivity growth, job creation, and investment scalability.

Way Forward

To enhance the investment climate, several measures are recommended:

• Strengthen Domestic Savings: Higher domestic savings are essential as they eventually translate into higher investment flows.
• Address the “Missing Middle”: Policy support must promote the growth of mid-sized manufacturing firms to enhance productivity and expand industrial capacity.
• Focus on Labour-Intensive Sectors: India must expand labour absorption in manufacturing, which has remained stagnant at 11–12% for several years. Labour-intensive sectors can employ a significant share of India’s growing workforce.
• Boost Exports: Support for export-led growth—through initiatives such as the Production-Linked Incentive (PLI) scheme—should continue, especially amid rising global protectionism.

Frequently Asked Questions (FAQs)

Q1. What is the current investment rate in India?
Answer: India's current investment rate stands at 31–32% of GDP, but the EAC-PM suggests it should rise to 34–35% for sustainable economic growth.

Q2. Why is private investment crucial for India's economy?
Answer: Private investment is vital for achieving high GDP growth rates and enhancing productivity, job creation, and overall economic development in India.

Q3. What are the barriers to private investment in India?
Answer: Barriers include global uncertainty, technological transitions, and structural gaps in the manufacturing sector, particularly the lack of mid-sized firms.

Q4. How can India increase its economic growth rate?
Answer: India can increase its economic growth rate by boosting domestic savings, addressing structural gaps in manufacturing, and supporting export-led growth initiatives.

Q5. What role does government expenditure play in investment?
Answer: Government capital expenditure stimulates the economy, generates multiplier effects, and creates a favorable environment for private investments to flourish.

UPSC Practice MCQs

Question 1: What investment rate is needed for India to achieve a sustained 7% GDP growth?
A) 30–31%
B) 32–33%
C) 34–35%
D) 36–37%
Correct Answer: C

Question 2: What is a significant barrier to private investment in India?
A) Abundant resources
B) Global uncertainty
C) High inflation
D) Overregulation
Correct Answer: B

Question 3: How does the "missing middle" problem affect India's economy?
A) Increases employment
B) Limits productivity growth
C) Enhances export capacity
D) Reduces global trade
Correct Answer: B