Long-term tax and regulatory certainty would grant private businesses the confidence to take risks
AMARENDU NANDY is an associate professor at Indian Institute of Management (IIM) Ranchi.
The economy appears to be on a stable footing ahead of the Union Budget. Growth clocked 6.5% in 2024–25, public capital expenditure crossed ₹11 trillion, its highest share of GDP in 15 years, and inflation has largely stayed within the Reserve Bank of India’s (RBI) tolerance band. Yet, a troubling imbalance lies beneath the macro aggregates. Private capital has not responded with the breadth or momentum one would expect at India’s current stage of development.
The public sector is doing most of the heavy lifting on capex, while the private sector, despite strong balance sheets and ample liquidity, has been cautious on long-term investment. According to rating firm ICRA, over the past decade, joint-stock companies have accounted for about 35% of India’s gross fixed capital formation (GFCF). In 2023–24, this fell to a decadal low of about 33%.
Among private companies, listed firms did step up capex, but their contribution is limited, accounting for barely 16% of private capex and around 5% of overall GFCF. Unlisted firms, which form the backbone of manufacturing and employment, have largely stayed out of the investment cycle. Notably, the household sector now contributes over 40% of GFCF, driven largely by investments in real estate and unorganised ventures.
The contrast is striking. Households appear willing to commit capital to long-lived assets, while corporations, evaluating 10–15 year industrial projects, draw more conservative conclusions about risk and return. This divergence points less to a shortage of savings than to confidence.
The statistics ministry’s latest survey shows that fresh private capex intentions for 2025–26 have moderated to ₹4.89 trillion from ₹6.56 trillion in 2024–25. This comes despite a cumulative 66% rise in announced investment plans over the previous three years, suggesting that the pipeline is thinning beyond a narrow set of sectors.
The RBI’s August bulletin projects a 21.5% rise in private corporate capex in 2025–26, but much of this increase is expected in power, renewables and transport—sectors closely tied to public investment and regulatory assurances. The painstaking repair of bank and corporate balance sheets over the past decade was expected to trigger a stronger capex response. Instead, for many firms, it has translated to risk containment.
Global uncertainty has played a role, but domestic policy risk has been equally important. Firms struggle to form stable expectations on taxes, trade policy and regulation over the life of long-gestation projects. The proliferation of Quality Control Orders (QCOs) illustrates the problem. Since 2019, their number has increased from 88 to 765, with nearly half covering intermediate goods critical to domestic supply chains.
While better standards is a legitimate goal (and some QCOs have been eased), the speed and breadth of implementation, particularly across metals, machinery and electronics, imposed certification delays and compliance costs that are burdensome for small enterprises. Combined with frequent tariff changes, shifting sectoral norms and ad-hoc tax interventions, regulatory moves have made investment outcomes harder to forecast. Unsurprisingly, capital has gravitated towards sectors with state-backed revenues rather than broad-based manufacturing and services.
This makes the upcoming Budget all the more consequential. With the new Income Tax Act of 2025 set to take effect from April, the Budget must embed tax predictability as a structural public good. Steps such as a rationalised and unified capital gains tax regime, inflation-indexed personal income tax thresholds for higher earners, and a credible medium-term commitment on corporate surcharge rates would lower uncertainty over post-tax returns and cut policy risk premia, which are essential for long-term capital formation.
Another structural constraint requires attention. Small firms face a persistent credit gap of ₹20–25 trillion and liquidity stress due to delayed payments, including from government entities. Their reluctance to invest is driven less by demand and more by cash-flow risk.
To revive private capex beyond a narrow corporate group, the Budget must treat payment discipline as an essential reform. Enforcing the 45-day payment rule for government and public sector procurements, supported by mandatory disclosure and automatic penalties, would be a more significant reform than credit subsidies. Credit-guarantee schemes should also shift focus from working capital to term investments, enabling small firms to undertake capex at lower cost.
There is also a tightening fiscal reality. If central debt must be reduced to 50% of GDP by 2030–31, government capex cannot sustain its current pace. The sustainability of India’s investment ratio will, therefore, depend on whether private capital fills the space that public investment can no longer occupy.
India does not lack investment opportunities; it lacks assurance that projects will move from conception to execution without friction, delay and policy drift. Until that confidence is restored, private capital formation will remain misaligned with India’s long-term growth ambitions.
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