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Private investments UPSC NOTE

 What is private Gross Fixed Capital Formation?

  • Gross Fixed Capital Formation (GFCF) refers to the growth in the size of fixed capital in an economy

  • Fixed capital refers to things such as buildings and machinery, for instance, which require investment to be created. 

  • So private GFCF can serve as a rough indicator of how much the private sector in an economy is willing to invest

  • Overall GFCF also includes capital formation as a result of investment by the government.

  • GFCF matters because fixed capital, by helping workers produce a greater amount of goods and services each year, helps to boost economic growth and improve living standards. 

  • In other words, fixed capital is what largely determines the overall output of an economy and hence what consumers can actually purchase in the market. 

  • Developed economies such as the U.S. possess more fixed capital per capita than developing economies such as India

When did private investments pick up in India?

  • In India, private investment began to pick up significantly mostly after the economic reforms of the late-1980s and the early-1990s that improved private sector confidence. 

  • From independence to economic liberalisation, private investment largely remained either slightly below or above 10% of the GDP

  • Public investment as a percentage of GDP, on the other hand, steadily rose over the decades from less than 3% of GDP in 1950-51 to overtake private investment as a percentage of GDP in the early 1980s. 

When did private investments pick up in India?

  • It, however, began to drop post-liberalisation with private investment taking on the leading role in fixed capital formation

  • The growth in private investment lasted until the global financial crisis of 2007-08

  • It rose from around 10% of GDP in the 1980s to around 27% in 2007-08

  • From 2011-12 onwards, however, private investment began to drop and hit a low of 19.6% of the GDP in 2020-21.

Will strong consumption spending increase private sector confidence?

  • Many economists in India have blamed low private consumption expenditure as the primary reason behind the failure of private investment to pick up over the last decade, and particularly since the onset of the pandemic. 

  • Their reasoning is that strong consumption spending is required to give businesses the confidence that there will be sufficient demand for their output once they decide to invest in building fixed capital

Will strong consumption spending increase private sector confidence?

  • Hence these economists have advised that the government should put more money into the hands of the people to boost consumption expenditure, and thus help kick start private investment.

How do government policies affect private capital formation?

  • Since 2011-12, private consumption has risen while private investment has witnessed a worrying fall as a percentage of GDP. 

How do government policies affect private capital formation?

  • The inverse relationship between consumption and investment is likely because the money that is allocated towards savings and investment, either by the government or by private businesses, comes at the cost of lower consumption expenditure

  • The biggest cost of low private investment would be slower economic growth as a larger fixed capital base is crucial to boost economic output.

  • The push by the government to increase government investment is also seen as a negative by some who believe that it crowds out private investment.

  • Others, however, think that government investment compensates for the lack of private investment. 

  • It should be noted, however, that private investors are considered to be better allocators of capital than public officials, helping avoid wasteful spending



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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Private investments UPSC NOTE
Private investments UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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