Syllabus: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Overview
- India’s potential growth rate in the post-COVID era, estimating it at 6.5%.
- The first-quarter GDP growth for 2025-26 is 7.8%, below the post-COVID average of 9.9% in previous years.
Key Findings
- GDP Growth: First-quarter (Q1) growth of 7.8% in 2025-26 is lower than previous averages (9.9% in 2022-2025).
- GVA growth in Q1 2025-26 was 7.6%, driven by strong manufacturing (7.7%) but slower service sector growth.
- Potential Growth: 6.5% potential growth based on stable GFCFR (around 33.6%) and volatile ICOR. To exceed 6.5%, GFCFR must rise or ICOR must fall below 5.2.
- Public sector investment increased from 21.6% (2021-22) to 25.1% (2023-24), but private sector investment needs to rise to sustain higher growth.
Gross Fixed Capital Formation (GFCF)
- Capital Formation refers to investing in assets like machinery, equipment, infrastructure, and human capital (education, health, skill development).
- Gross Fixed Capital Formation (GFCF) is the growth in the size of fixed capital in an economy, including purchases of land, machinery, infrastructure, and the construction of roads, etc.
- Key Components of GFCF
- Includes: Infrastructure (e.g., airports, roads), machinery, and equipment; major repairs extending the life of assets.
- Excludes: Intangible assets (e.g., software), household consumption, natural disaster losses, and intermediate consumption.
- Importance of GFCF
- Growth Multiplier: GFCF is positively correlated with GDP, leading to increased output and living standards.
- Boosts Productivity: It helps in enhancing productivity, thereby improving the economy’s overall performance.
- Market Confidence: GFCF indicates future business activity, investment trends, and economic growth potential.
- Hindrances to GFCF Growth
- Slow Reforms: Delays in land acquisition and other reforms deter investment.
- Financial Issues: Problems in banking and corporate sectors lock capital and hinder new projects.
- High Borrowing Costs: Elevated lending rates, driven by high inflation, reduce the flow of investment.
Incremental Capital-Output Ratio (ICOR)
- ICOR refers to the additional capital required to generate additional output.
- It explains the relationship between investment in an economy and the increase in GDP.
- ICOR in Practice
- For example, if 10% additional capital leads to 1% increase in output, the ICOR is 10.
- A lower ICOR indicates higher efficiency in capital usage, meaning that less investment is required for the same output growth.
- A country with an ICOR of 3 is more efficient than one with an ICOR of 5, as it requires less capital to achieve the same output growth.
Q- Explain the concept of Gross Fixed Capital Formation (GFCF) and its role in driving India’s economic growth. Discuss the key challenges hindering GFCF growth and suggest policy measures to overcome these challenges. (15 Marks/ 250 Words)
