in corporate By actively contributing to Gross Fixed Capital Formation (GFCF) in recent years, the business sector has played a crucial part in fostering economic growth. The growth and general health of an economy are significantly impacted by the increase in investments in the creation of tangible goods like buildings, machinery, and infrastructure. An important financial institution, ICICI Securities, examined this pattern and offered insightful analysis into the expanding contribution of the business sector to GFCF.
In a report , ICICI Securities Ltd. said that the corporate sector has started to contribute to the rise of gross fixed capital formation (GFCF) in FY23.
According to state budget projections, aggregate state government capex, which lagged behind in FY23, is predicted to accelerate in FY24. On the basis of FY23 BE (Budget projections), capex is projected to increase YoY by roughly 17% and reach Rs 8.4 trillion.
Even with a 10% shortfall, state capital expenditures might still surpass the 7.6 trillion rupee milestone. According to ICICI Securities, the central government has already committed Rs 10 trillion in the Union Budget for capex, which given the strong tax buoyancy, looks realizable.
The increase in GFCF was a major factor in the post-pandemic economic recovery. To reach Rs 67.9 trillion in nominal terms during FY22, it increased 25.6% year over year (YoY). According to the research, the federal government’s infrastructure capex push and household real estate investments were the main drivers of growth in FY22, while state governments and corporations fell behind in terms of capex growth.
Gross Fixed Capital Formation refers to the net increase in the stock of fixed assets in an economy during a specific period. It includes investments made by both the government and the private sector. GFCF plays a vital role in stimulating economic growth by driving productivity, creating job opportunities, and enhancing the overall competitiveness of industries.
Traditionally, the government has been a significant driver of GFCF through its investments in infrastructure development, public projects, and social sectors. However, in recent years, there has been a notable shift in the contributions to GFCF, with the corporate sector playing an increasingly prominent role.
ICICI Securities, a renowned financial institution, has conducted a comprehensive analysis of the changing dynamics in the GFCF landscape. Their research indicates that the corporate sector’s contribution to GFCF has witnessed substantial growth over the past decade.
The report highlights several key factors that have contributed to this shift.
- 1. Investment-Friendly Policies: Governments across the globe have implemented policies aimed at attracting private investments. This has created a favorable business environment for corporations, encouraging them to invest in capital-intensive projects.
- Infrastructure Development: The corporate sector has actively participated in infrastructure development projects, including transportation, energy, telecommunications, and urban development. These investments have not only improved the overall infrastructure of nations but have also stimulated economic growth.
- Technological Advancements: With rapid technological advancements, companies are investing heavily in research and development (R&D) and innovation. These investments are directed towards improving productivity, efficiency, and competitiveness, leading to a positive impact on GFCF.
- Public-Private Partnerships (PPPs): Governments are increasingly entering into partnerships with private companies to develop and maintain infrastructure projects. This collaboration has allowed the corporate sector to actively contribute to GFCF while benefiting from the projects’ long-term revenue streams.
- Foreign Direct Investment (FDI): The inflow of FDI has been instrumental in boosting GFCF. Multinational corporations often invest in setting up manufacturing units, expanding operations, and establishing supply chains, leading to a substantial increase in fixed capital formation.
Benefits of Corporate Sector’s Contribution
The growing contribution of the corporate sector to GFCF carries several benefits for the overall economy:
- Economic Growth: Increased investments by the corporate sector lead to enhanced productivity and competitiveness, ultimately driving economic growth.
- Job Creation: Investments in fixed assets often result in the creation of new job opportunities, reducing unemployment and improving living standards.
- Improved Infrastructure: Corporate investments in infrastructure projects lead to the development of modern and efficient facilities, enhancing the quality of life for citizens and supporting the growth of other sectors.
- Technological Advancement: Companies’ focus on R&D and innovation leads to technological advancements, benefiting industries and paving the way for future growth.
An encouraging development in the economy may be seen in the corporate sector’s increasing contribution to Gross Fixed Capital Formation. The report by ICICI Securities identifies the elements that are causing this transition, such as investor-friendly regulations, growing infrastructure, technological breakthroughs, public-private partnerships, and foreign direct investment. The business sector actively engages in capital-intensive initiatives, which benefits the economy as a whole by increasing productivity, creating jobs, developing infrastructure, and advancing technology. This tendency highlights the significance of fostering an environment that is favorable for business investments in order to sustain economic development over the long term.
