Overfunded or Underbuilt?: Rethinking India’s Capital Allocation Story

India's capital allocation story has become increasingly imbalanced. Since 2016, public sector investment has increased because of large infrastructure projects, but private corporate capital spending has not caught up. From FY2020 to FY2024, government capital expenditures (capex) went up by 38.8% in total, but private gross fixed capital formation (GFCF) fell to about a 3rd of the GDP in 2024.

Illustration by The Geostrata

Companies have a lot of cash on their balance sheets, but low demand and low use are keeping investment rates on the lower end. Foreign investments are at an all-time high (FDI reached $81.0 billion in FY2024–25), but funding for urban projects usually drains out quickly, and many rural and projects in construction are still not built or are behind the charted out schedule.

PUBLIC VS. PRIVATE CAPEX (2016–2025)

The amount spent on public infrastructure doubled. The investment landscape has changed a lot since 2016. For example, the Union government's capital spending will go up by almost 40% from FY2020 to FY2024. Private investment stopped growing. In 2021–24, private gross fixed capital formation (GFCF) made up 26–28% of GDP. This is down from over 40% ten years ago. In short, GFCF growth (7–8% in FY2024–25) is slower than GDP growth. So, public capital expenditures now make up a much bigger part of total investment than they did before.

The RBI said that the "continued policy thrust on infrastructure" has made many companies less likely to invest. Many of them enter fiscal 2025–26 with good but lean balance sheets, but they are wary of their capital expenditure plans. The RBI says that private sector capex will rise by 21.5% in FY2025–26 (to 2.67 lakh crore, or about $32 billion), as companies use extra cash to get projects back on track.

After this, private capital expenditures will go down in FY2023–24. In short, government spending has definitely helped India's recovery, but private investment has not grown as much as it should have. Public capital expenditures have been too high compared to stable absorption, and private capital expenditures have not been built as planned.

FINANCIAL INTERMEDIATION AND FOREIGN INVESTMENT

Capital flows help bridge the gap between savings and investment. Banks and NBFCs have been resilient by late 2025, India’s financial system was “fortified by healthy balance sheets of banks and non-banks,” and banking sector NPAs are at multi-decade lows. Credit growth has been double-digit in 2024-25 after a lull, providing more credit to fund capex. But, much of the credit flowed to consumption and working capital, not new fixed investment: RBI noted that banks are “going slow on consumption-oriented credit,” but corporate loan growth has been constrained by low demand.

Non-bank mutual funds and bond markets have expanded, offering different sources of financing, though corporate bond issuance is still a work in progress. Internationally, foreign capital is pouring in:

FDI reached a record $81.04 billion in FY2024–25, up 14% year on-year levels. Services led FDI (19%), followed by software/hardware and manufacturing. Maharashtra, Karnataka, and Delhi accounted for 65% of the inflows. Portfolio investment flows have also been robust (though volatile in 2022-24).

They have helped finance infrastructure projects (e.g., monetisation deals and green energy investments) and corporate expansion. Though foreign funds can’t totally make up for the domestic shortfalls. Even at a 50-year lows 5.3% of GDP in 2023-24, there is still a savings-investment gap that must be filled. In sum, credit and capital markets are overall doing okay, but efficiencies in allocation need to be improved. The money is there. That is not the problem. The problem is where it goes and where it doesn’t.

REGIONAL AND PROJECT-LEVEL MISMATCHES 

India’s capital allocation is also not evenly spread out across regions and projects. Cities have been focusing on infrastructure (metros, highways near cities, digital networks), while rural roads, irrigation, and basic urban services have been neglected. For example, urban metro and rapid transit projects are multiplying (covering 1,000+ km in 29 cities, when rural areas still wait for all-weather roads or piped water).

In some sectors, too much capital has flown into the wrong projects. For instance, 74 of India’s 365 major shopping malls (nearly one-fifth) are now “ghost” centres with high vacancies. 15 centres (4.8 mn sq ft) could generate 357 crore annual rents if revivified. This overcapacity is a result of past overinvestment in lower-tier retail developments. On the other hand, many of the announced infrastructure projects are behind schedule or underbuilt.

As of March 2026, 85 national highway projects were delayed by an average of three years on average due to land acquisition or financial bottlenecks.

PATHWAY TO INCREASING EFFICIENCY

India's capital allocation story is one of contrasts: while private investment has lagged and project execution has been inconsistent, the country has experienced record financial buffers and strong headline growth. If businesses continue to be unsure about investing in capacity and if fiscal consolidation forces public capital expenditure cuts too soon, there is a risk that returning growth will be hindered.

In order to increase effectiveness, policies should focus on:

(1) Increasing bank and bond financing for private capital expenditures, such as improving corporate bond liquidity and infrastructure risk-sharing;

(2) Promoting the use of corporate funds for new initiatives, maybe through positive reinforcements/rewards or stronger rules regarding excessive buybacks and dividends;

(3) bolstering project execution through expedited clearances and accountability (as the government is doing with land-acquisition portals and bottleneck cells);

(4) Reducing regional polarities and conflicts by giving underdeveloped rural and semi-urban infrastructure top priority; and

(5) Expanding financial markets to direct domestic savings into profitable investments, including changes to increase pension and mutual fund flows into private equity and infrastructure debt.

Such actions could assist in converting India's abundant resources into the "durable growth" indicated by capex intentions if they are in line with ongoing macroeconomic stability.

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BY CHIRAG JOSHI

TEAM GEOSTRATA

info@thegeostrata.com