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.

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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 distribu