Hi all!
It is well known that stock markets go up if investors expect economy to grow.
And stock markets boom if they expect economy to grow for years!
Stocks move sharply and valuations rise if there is a confidence that economy will definitely grow. The more the confidence, the higher is the demand for stocks and the higher are their prices.
The important question here is – what factor can give us such confidence?
The answer is not simple, there are several factors that decide the future growth of an economy. But, one of the most important factors for a
long-term sustainable growth is private investment. It is the mainly the money invested by companies in industry in form of new factories or upgradation, etc.
It is logical to understand because the more is the investment in industry, the higher will be employment, income, and consumption – overall an economic boom.
Private investment is also important because it is a direct component of GDP calculation. An economic term known as Gross Fixed Capital Formation (GFCF) is used as a proxy to find how much is the private investment in a country.
It is one of the four components of GDP and is most important for building a base of long term growth. More investment leads to more jobs, more income, more consumption, and then it is a virtuous cycle. Why it is crucial for India is because it had been declining (as a % of GDP) since the 2008 financial crisis.
Chart – GFCF as % of GDP
It was near 35% of GDP in 2007 and it touched a low in 2020 at 26.6%. As a percentage share of GDP, GFCF was 29.2 per cent in FY23, 28.6 per cent in FY22, and 26.6 per cent in FY21.
If after 15 long years, this GFCF recovery sustains, it will be a major boon to Indian economy. Other than a resurfacing of global inflation – India does not face any major immediate risk.
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