High cost of capital, not weak balance sheets, holding back private capex: Economic Survey

Private capex

• India's high capital costs and structural issues hinder private investment growth.
• Public capex can't boost private investment without policy and cost reforms.
• Private investment shifts to services over manufacturing due to constraints.

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Private investment in India remains constrained not by a lack of intent or financial stress but by deeper structural factors, which keeps corporates cautious on large expenditures, the Economic Survey 2025–26, released on January 29, has said.

While public capex has scaled up sharply in recent years and corporate balance sheets are healthier, the survey argued that private investment will not automatically follow unless the cost of capital, institutional frictions and fiscal incentives are addressed more decisively.

A central argument in the survey is that India’s cost of capital remains structurally high, limiting the appetite for long-gestation private projects.

Structural constraints

Beyond interest rates and banking spreads, the survey frames this as a macroeconomic outcome of India’s persistent current account deficit and dependence on foreign savings. Countries that rely on external capital, it argued, must pay a risk premium, making capital more expensive across the economy. As a result, even financially strong firms prefer incremental expansion, brownfield projects or services-led growth over large greenfield manufacturing investments.

According to the survey, this structural constraint helps explain why India’s private investment response has been uneven despite a sustained public infrastructure push. The survey acknowledged that public capital expenditure has improved logistics, eased supply-side bottlenecks and raised the economy’s potential growth rate. Public capex can crowd in private investment only when complemented by predictable policies, lower input costs and stronger institutional capacity. Without these, public spending risks becoming a ceiling rather than a catalyst for private capex, the survey noted.

The survey also draws a sharp distinction between productive public investment and transfer-heavy fiscal strategies, particularly at the state level.

Services over manufacturing

While Centre's capex and interest-free loans to states under the Special Assistance to States for Capital Investment scheme have helped protect infrastructure spending, the growing reliance on unconditional cash transfers by several states is flagged as a risk. Such spending, the survey said, raises revenue deficits and crowds out fiscal space for capital formation, indirectly dampening private investment sentiment by weakening the pipeline of infrastructure projects and complementary public goods.

Another reason for subdued private capex lies in the sectoral skew of investment, the economic survey said.

The survey explained why private investment has gravitated more towards services than manufacturing. Services firms can scale with lower fixed capital, bypass weak infrastructure, and adapt more quickly to regulatory or market changes. Manufacturing, by contrast, imposes “hard constraints” on land, power, logistics, skills and governance. Until these constraints are addressed comprehensively, private manufacturing investment is likely to remain selective rather than broad-based.

The survey also cautioned against relying on protectionist trade measures to stimulate private manufacturing investment.

High tariffs in upstream sectors, it said , may provide temporary relief to capital-intensive producers but often raise costs for downstream industries, hurting export competitiveness and discouraging scale. Lowering the cost of capital, improving logistics and ensuring reliable energy supply are presented as more effective ways to revive private capex than negotiated tariff protection.

Global headwinds

Uncertainty in the global environment further complicates the private investment outlook, the survey noted.

It highlighted rising geopolitical risks, trade fragmentation and volatile capital flows as factors that make firms more cautious about committing to long-term investments. In such an environment, policy credibility, regulatory stability and execution capacity become critical determinants of private investment decisions. Firms are more likely to invest when rules are predictable and approvals time-bound, even if global conditions remain uncertain.

The survey also pointed to asset monetisation and disinvestment as an underutilised lever to support both public and private investment.

Recycling public capital from mature assets can fund fresh infrastructure projects, reduce pressure on public borrowing and create a pipeline of investable opportunities for long-term private capital, including pension funds and insurers. Done well, this approach can strengthen the link between public capex and private participation.