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Picture Courtesy: The Hindu

Context:

As global trade faces prolonged uncertainty due to tariffs and disruptions, India’s economy must focus on strengthening domestic investment and inclusive growth.

Reasons to Prioritize Domestic Investment:

• Shielding the Economy from External Shocks: Focusing on domestic demand and investment can provide stability against fluctuations in global markets and declining external demand. 

• Promoting Self-Reliance: Investing domestically supports the vision of “Aatmanirbhar Bharat” by boosting local manufacturing capabilities and decreasing reliance on international supply chains. 

• Fostering Sustainable and Inclusive Growth: Domestic investment especially in public sectors like infrastructure, education, and healthcare can reduce regional inequalities and foster human capital development. 

• Generating Employment Opportunities: An increase in both public and private domestic investment drives job creation on a significant scale. 

• Strengthening the Impact of Foreign Investment: A robust domestic investment environment enhances the economy’s ability to absorb foreign direct investment 

Challenges in boosting domestic investment:

• Uncertain Economic Outlook: Sluggish consumption in both urban and rural areas has created uncertainty about future demand. From mid-2024 revealed a softening in urban and rural demand, a trend that became particularly noticeable after a post-COVID consumption boom.  

• Crowding Out of Private Investment: Elevated government borrowing to fund public spending may drive up interest rates, potentially discouraging private sector investment.
• India's total public debt is projected to reach approximately ₹196.79 trillion by the end of the fiscal year 2026

• Infrastructure Deficits: Inadequate infrastructure such as unreliable logistics, transportation networks, and inconsistent power supply raises business costs and hampers productivity.

• Regulatory Complexity and Policy Uncertainty: Complex and frequently changing regulations, including shifts in tax and e-commerce policies and retroactive tax disputes.

• Unemployment and Skill Mismatches: Despite a large youth population, many sectors suffer from “jobless growth” due to a mismatch between workforce skills and industry needs. In the past three decades, despite the economy expanding at a much faster pace—between 5% and 8% annually—job creation has slowed significantly, averaging only about 1% per year.

Way forward in boosting domestic investment:

• Accelerate Infrastructure Growth: India needs to fast-track infrastructure development to close existing gaps and reduce costs of doing business. 

• Simplify Regulatory Framework: To attract more investment, India must further streamline its regulatory systems. Building on the progress of eliminating over 25,000 compliance requirements and reducing penalties for minor infractions. 

• Reform Labour Laws and Strengthen Skill Development: Swift implementation of the four new labour codes can bring flexibility to the labour market and encourage formal employment. Efforts like the Pradhan Mantri Kaushal Vikas Yojana and public-private training partnerships (e.g., Google-NASSCOM’s cloud training program) should be expanded to address industry-specific skill shortages. 

• Strengthen the Banking Sector: Revamping India’s banking system is critical for improving credit access and investor confidence. 

• Improve Intellectual Property Protection: A stronger Intellectual Property Rights (IPR) regime is vital to attract investments in high-tech and R&D sectors. Reducing the time for initial patent assessments from 18 months to 14–15 months. 

Government measures to enhance domestic investment:

• Corporate Tax Reductions: To encourage investment, the government introduced a concessional corporate tax rate of 22% for existing domestic companies and a 15% rate for new manufacturing firms. 

• Production-Linked Incentive (PLI) Schemes: Covering 14 strategic sectors, PLI schemes offer financial incentives based on incremental production in India. 

• Support for MSMEs: Recognizing the importance of Micro, Small, and Medium Enterprises (MSMEs), schemes like the Emergency Credit Line Guarantee Scheme (ECLGS) and RAMP (Raising and Accelerating MSME Performance) have been implemented. 

• PM Gati Shakti Master Plan: A GIS-based platform aimed at improving infrastructure planning and coordination across ministries. 

• National Capital Goods Policy (2016): Aimed at enhancing the domestic capital goods sector, this policy focuses on increasing the sector’s share in manufacturing, promoting innovation, and providing financial and technical support. 

Source: The Hindu