Industrial investment: Demand is at the heart of India’s capex conundrum

Without tackling core demand problems by empowering wage earners, easing household balance-sheet stress and revitalizing exports, sustained growth in industrial capex will remain out of reach. To achieve this, addressing the fundamentals of India’s economy is now imperative.

India’s investment trends have been on a roller-coaster ride over the past decade. More than half a decade ago, investment as a share of gross domestic product (GDP) had begun to recover from a low in 2017, but only to be knocked back by the pandemic. While the post-pandemic rebound pushed investment up to 33.7% of GDP in 2024-25, outpacing the previous decade’s average, it is still shy of the peak seen in 2011-12. 

To drive a meaningful economic transformation, India needs consistent real GDP growth of 8%, anchored in manufacturing and exports. India must push its investment rate higher to 36-37% to achieve this goal.

Also Read: A private capex slump: An imperfect but indicative survey points to one

A closer look at the recent investment cycle reveals a story of uneven momentum. India’s capex revival has been driven by households, construction assets and the services sector. This highlights the real estate-driven nature of investments in recent years, while private corporate or manufacturing capex has remained on the sidelines. The current capex cycle is narrower in scope compared to the broad-based investment surge of the early 2000s, when services, manufacturing and public infrastructure capex surged in unison. 

Underlying these investment trends is a deeper demand problem that is also reflected in industrial capacity utilization (CAPU) data. An analysis of Annual Survey of Industries  (ASI) data and surveys by India’s central bank indicate a troubling trend over the past two decades: after robust utilization rates of above 80% through most of the 2000s, CAPU rates have steadily declined. 

That rate declined to around 70% by 2016, but then abruptly dropped during the pandemic. While there’s been a notable recovery in the post-pandemic period, with CAPU again breaching the 75% threshold by some measures, it is yet to reach and stay at levels historically needed to trigger a sustained capex wave after nearly a decade of slack. Businesses typically need to see consistently high utilization (80% or higher) and clear evidence of demand before committing funds to major new projects, something that is still lacking after years of weakness.

The big question is why demand has failed to materialize the way India needs. The answer lies in two interlinked trends: a weakening of domestic consumption and the slowing pulse of global trade. 

Also Read: Domestic private capital plays a key role in financing Indian businesses

On the domestic front, household consumption growth has trended lower in the past decade-and-a-half, with fundamental shifts in income distribution and personal finances. ASI data shows that the profit share of industrial output has grown much faster than wages, with the gap now at its widest in years. This dynamic is problematic because wage earners tend to spend a greater share of their income than profit earners. As profits concentrate and real wage growth stagnates, overall consumption growth falters. The squeeze is especially acute for low-skill industrial workers, who make up over 60% of India’s industrial wage bill and have seen the weakest real wage gains (of less than 2.5% on average) among various groups in the last five years.

At the same time, Indian households are grappling with rising debt. Personal bank borrowing has grown faster than incomes in real terms over the past half decade, leaving households more leveraged and less able to increase consumption. 

Also Read: Reform agenda: What India must do to get private sector investment going

Meanwhile, foreign demand, once a key driver of India’s investment boom, has also faded. In the 2000s, exports powered GDP growth and helped justify rapid expansion in manufacturing capacity. The contribution of exports has waned dramatically since 2011, reflecting a stagnation in global trade as well as rising global overcapacity, particularly in China.

Aggressive export strategies by foreign producers, especially in sectors like steel, chemicals and electric vehicles, are also making conditions tougher for Indian manufacturers, pressuring margins and further discouraging investment. India’s services exports—particularly of information technology and other business services—have continued to impress. But their impact on physical capex is limited, as these sectors are less capital-intensive and their spillover is largely confined to commercial real estate.

Also Read: Vivek Kaul: Is capital gains tax to blame for the exodus of foreign investors?

Monetary policy alone cannot revive industrial capex, as lower interest rates or more liquidity do not address structural demand deficiencies arising from tight household finances and volatile export markets. Meaningful growth requires deeper reforms to boost disposable incomes. GST rate rationalization is a positive step. Raising India’s investment rate will depend on how successfully we are able to unlock household demand and support Indian manufacturers locally and globally. 

The ‘fire’ of industrial capacity expansion needs genuine demand fuel, not just sparks from cyclical policy levers. It’s time for India to focus on the economy’s fundamentals.

The author is an economist at ANZ Research.