India need to have GFCF of 30% to attain 12% nominal GDP growth: Elara

Investments for GDP growth: India may need to maintain its gross fixed capital formation, as a percentage of GDP, consistently at 30 per cent through the next decade (present 30 per cent) on a nominal basis to be able to attain 12 per cent nominal GDP growth in the next 8-10 years, a report by Elara Securities showed.  GFCF is a very important measure of investments in the economy. 

This requires the government to continue to spend in the near term as private sector capex is yet to pick up in a sustained manner. 

“Sustained higher capital formation may allow for higher employment elasticity as past cycles of capex have shown. Sustained high capital expenditure may also lead to gains in total factor productivity,” the report added further. 

According to the World Bank, the GFCF as a share of GDP stood at 29 per cent in 2022. The GFCF was highest in 2007 at 36 per cent of GDP, which declined to reach 34 per cent of GDP in 2011

Technology and Investments

Assuming technology to be an exogenous factor that improves consistently, per our analysis, consistent higher capital formation (30 per cent as a share of GDP) may spike total factor productivity in India by 11 per cent by FY30E from pre-Covid (FY19) and 26 per cent by FY40 (estimated). According to the report, assuming nominal GDP growth of 11 per cent from FY35 (estimated), we see India reaching a nominal per capital GDP of $15,152 by FY40 (estimated). 

“This is to be aided by total factor productivity of 1.34 by FY40E (1 in FY19), the necessary condition for which is constant GFCF as a percentage of GDP rate of 25-30 per cent through FY25E-40E,” the report stated.