Why Indian capital needs to invest domestically?

For Preliminary Examination: Current events of national and international Significance

For Mains Examination: GS III - Economy

Context:

A central challenge for policy makers in India, at the present juncture, is to work out a balance between the long-term benefits of global trade and the short-term harms that current uncertainties pose to large sections of the population who are at risk of low wages and unemployment. Tackling this requires a change of the existing system to account for the needs of the larger masses rather than only enriching private capital’s interests.

Read about:

What is Capital Expenditure?

What is Capital gain tax?

Key takeaways:

• Indian capital has a pivotal role in shaping economic change by broadening its vision beyond short-term profits and aggressive accumulation. The history of capitalism demonstrates that it is not a rigid system; it has adapted in the past and can do so again to remain relevant.
• With the economy exposed to risks such as weakening global demand, rising tariffs, and trade disruptions, Indian capital must reinvent itself and collaborate with the government to cushion these shocks.
• Traditionally, private businesses in India have demanded greater involvement in the economy along with incentives, subsidies, and a liberal business climate. For decades before liberalisation, many enterprises thrived in a protected domestic market, benefiting from import restrictions and policies that shielded them from global competition.
• This allowed them to earn supernormal profits and build reserves, which later enabled expansion into global markets in the 1990s. Although not all Indian firms ventured abroad, this trend produced strong industrial players who continue to dominate key sectors today.
• Now, as the global economy enters a prolonged period of instability, Indian business houses must realign with public interest and work hand in hand with the state to sustain growth momentum.
• The emergence of modern mass markets globally has historically been driven by three factors: the rise of wage labour, the productivity gains of industrial-scale manufacturing, and shifts in consumer demand as incomes increased.
• Demand growth, though often overlooked, is a vital component of this process. Without rising demand, firms cannot fully capitalise on expanded supply. Yet many macroeconomic models still assume demand automatically adjusts to supply, undervaluing its central role.
• In today’s interconnected world, demand stems from both domestic and external markets. While earlier strategies of industrialisation focused on internal demand and later turned outward, current global turbulence has weakened external demand, disrupting exports and creating vulnerabilities.
• This situation underscores the need to stimulate domestic demand and build resilience by strengthening internal markets.

The Importance of Domestic Capital

For India, domestic capital is crucial to revitalising demand and can act through three key channels:

1. Boosting private investment
Despite record profits, Indian companies have been reluctant to expand investments. Public investment has been driving growth, with fiscal and monetary policies providing support through incentives, credit, tax reforms, and infrastructure spending. Capital expenditure by the government has jumped significantly—from ₹3.4 lakh crore in FY20 to ₹10.2 lakh crore in FY25. However, private investment remains stagnant. Interestingly, while domestic investment lags, Indian outward FDI has risen sharply, suggesting a preference for foreign opportunities over the domestic economy. A reversal of this trend is needed to accelerate domestic growth.

2. Supporting wage growth
The Economic Survey 2024–25 highlighted rising corporate profits but stagnant wages, with 2023–24 marking a 15-year high in profits while wage growth faltered. Projections suggest further slowdown in real wage growth, undermining income distribution and weakening domestic demand. The increasing shift toward contractual employment within formal sectors has eroded workers’ bargaining power, especially in manufacturing, worsening the problem. Sustained and equitable wage growth is essential to balance profitability with inclusive demand.

3. Increasing investment in Research and Development (R&D)
India’s expenditure on R&D remains insufficient at 0.64% of GDP, heavily reliant on government funding. In advanced economies such as the U.S., Japan, and South Korea, private enterprises account for over 70% of national R&D expenditure, while in India the figure is only around 36%. Moreover, private investment in innovation is concentrated in a few sectors like pharmaceuticals, IT, defence, and biotechnology, neglecting broader scientific and industrial research. To secure long-term productivity gains, Indian capital must step up investment in fundamental research and innovation, shifting focus from short-term returns to sustained growth

Follow Up Question

Mains

1."Capital expenditure is often highlighted as a key driver for long-term economic growth, yet India faces challenges in mobilising private sector investment despite record corporate profits" Discuss

Prelims

How India is adopting stablecoins?

For Preliminary Examination: Current events of national and international Significance

For Mains Examination: GS III - Economy

Context:

Stablecoins are a category of crypto assets that aim to maintain a stable value relative to a specified asset, or basket of assets, providing perceived stability. Various definitions of stablecoins exist, with different countries; standard-setting bodies such as the Financial Stability Board, Bank for International Settlements and International Monetary Fund; and many central banks contributing to these definitions.

Read about:

What are Stablecoins?

Virtual Digital Assets (VDAs) 

Key takeaways:

Stablecoins are a category of crypto-assets designed to hold a steady value relative to a specific currency, commodity, or even a basket of assets. Their central purpose is to provide stability in a space known for volatility. While definitions vary across jurisdictions and financial institutions, bodies like the Financial Stability Board (FSB), Bank for International Settlements (BIS), the International Monetary Fund (IMF), and several central banks broadly agree on this function.

At their core, stablecoins are blockchain-based tokens whose value remains consistent over time because they are supported by reserves—whether fiat currencies, commodities, or other digital assets. This makes them a unique type of Virtual Digital Asset (VDA), distinct from more speculative cryptocurrencies.

Types of stablecoins:

• Fiat-backed stablecoins – Supported by reserves of national currencies like the U.S. dollar or euro, typically held by banks or regulated custodians (e.g., USDT, USDC).

• Crypto-backed stablecoins – Secured by collateral in the form of other cryptocurrencies. A well-known example is DAI, backed by Ethereum.

• Algorithmic stablecoins – Do not rely on reserves but instead use self-regulating algorithms that adjust supply and demand to maintain stability. These are more experimental and risk-heavy, as shown by the collapse of TerraUSD

From Experiment to Institution

Once confined to the crypto ecosystem, stablecoins are now firmly on the radar of global finance. Major players such as BlackRock, Fidelity, and Bank of America have rolled out stablecoin initiatives, while in 2025, Société Générale became the first European bank to issue a dollar-backed token. Regulators, too, are legitimising their use—through frameworks like the EU’s MiCA regulations and the U.S. GENIUS Act, which establish rules on reserves, transparency, and consumer protection.

A new layered financial architecture is emerging:

• Blockchain as the base layer – decentralised, transparent, and interoperable.

• Reserve institutions as the middle layer – regulated entities ensuring stable backing through fiat or treasuries.

• User-facing interface layer – digital wallets, APIs, and payment cards making stablecoins accessible for everyday commerce