Investment is a key to sustainability of economic growth, apart from productivity as measured by capital-output ratio. Going by the indicator of investment, India has done quite well. Thus, the gross capital investment rate (gross domestic capital formation/gross domestic product at current prices), which was at a low of 8.4 per cent in 1950-51 and around 9 per cent average over 1950-51 to 1955-56, rose to 12-13 per cent average in the later half of the 1950s due to emphasis on machines to build machines.
The country could not make any headway during 1960s due to some drought years and the ratio remained stuck at 13-14 per cent over the decade. Investment intensity stepped up to 18 per cent average in 1970s, with the last two years witnessing the ratio rise to 20+ per cent.
The 1980s and 1990s saw a steady rise in the investment pace due to initiation of reforms in 1980s and deepening and widening of reforms including those in licensing requirements in 1990s (barring 1991-92 to 1994-95 that bore the deep impact of forex crisis). The average rate scaled to 25 per cent during the second half of 1990s, ending with 26 per cent on the eve of the 21st century.
The new millennium started with a slowdown in economy and the investment; the investment rate slid to 23 per cent by 2001-02. Since then, the investment has gathered steam and a decisive turn in investment intensity came in 2004-05 when the ratio crossed 30 per cent mark to scale to 32 per cent. The 2005-06 and 2006-07 enjoyed further rise to around 36 per cent in the ratio of investment to GDP at market prices. While the data for 2007-08 are not available, going by a slowdown in GDP growth, investment rate could see a marginal decline. Incidentally, investment has increased at a faster rate, relative to consumptions, in last three-four years and this in conjunction with 8-9 per cent robust GDP growth has catapulted the country at the centre stage in strategic plans of MNCs.
While the country has done creditably on investment front, we cannot say the same thing about productivity of capital. Thus, average output to capital investment ratio declined from around 9:1 in the fifties to 4:1 by early 21st century and sub-3:1 in investment buoyant years of 2004-05 to 2006-07. Here, it may be noted that high investment dose relative to income generation particularly over past five-six years, reflects massive investments into low-income, high-gestation projects in urban/rural infrastructures, electricity, roads, ports and railways, which after they get progressively commissioned are sure to facilitate further income growth in future years.

GFCF by assets
Gross fixed capital (assets) formation, or investment (GFCF) was estimated at Rs 13.46 trillion in 2006-07; which is thrice the investment of Rs 4.56 trillion seven years back. Mirroring the changing focus of projects investment from industry to services and infrastructure, the share of construction in fixed assets investment increased to 54 per cent in 2006-07, from 43 per cent a decade ago, while that of plant and equipment declined from 57 per cent to 46 per cent.
On the one hand, the share of public sector in construction went down rather steeply from 42 per cent in 1993-94 to 29 per cent by 2006-07; the private corporate sector on the other upped its share from 8 per cent to 20 per cent. This possibly mirrors increasing commitment by private corporate sector in infrastructure building. The household sector, conceptually the residual sector in macro data on ownership includes non-corporate business units. The segment saw significant intra-period volatility in shares, but accounted generally for around a half of the construction activities in the country.
Private corporates accounted for 62 per cent of plant & equipment buying in the country in 2006-07; against 37-38 per cent in recent low-investment years of 2001-02 to 2003-04, when corporates had suffered a dip in earnings and investment. While households have maintained their share at 20-21 per cent, public sector has lost out to private corporates in plant investment, with its share dipping to a low of 12 per cent in 2006-07. Buoyed by booming profits and enormous investment opportunities under accelerating liberalisation, the private corporates are on capex binge across a wide spectrum of sectors.
Gross fixed capital investment (GFCF) plus inventory change and addition to valuables (which is not classified by ownership or industry) equals gross capital formation (GCF). In addition, at aggregate level, conceptually the difference between income and consumption expenditure (i.e. domestic saving) plus foreign capital inflow is another measure of gross capital formation. A part of this aggregate that can not be classified into assets or ownership is defined as errors and omissions (E&O). In 2006-07, GFCF was Rs 13,465 billion, inventory change Rs 961 billion, valuables Rs 497 billion and E&O Rs (-)45 billion, giving an unadjusted total GCF of Rs 14,878 billion.

GFCF by ownership
One of the major planks of the ongoing reforms is the truncated role of public sector in economic activities. Reflecting a relative success in this area, the share of public sector in projects investment eroded steadily from 40 per cent in 1994-95 to 23 per cent by 2006-07. The decline was both in construction and plant and equipment segments.
Private corporate sector investment trend could be split into good years of 1996-97 and 1997-98, followed by a prolonged slack in earnings and the resultant constrained project investment till 2002-03 and a rebound in earnings and capex over the subsequent four years. Thus, the share of private corporates in project investment increased from 27 per cent in 1993-94 to 38 per cent in 1996-97, then eroded gradually to 22 per cent in 2002-03 and sprang back to 39 per cent by 2006-07.

GCF by industry
One thing that clearly stands out from investment data by sector is the neglect of agriculture, forestry and fishing, which could get only 7-9 per cent of capex spending in the country (barring some low investment years when the rate had worked out to 10-11 per cent). Starved of investment, agriculture on which three-fifths of population depend for livelihood, has grown at just around 3 per cent average in the first seven years of the 21st century - about one-third to one-fourth the rate in non-farm sectors of industry and services, However, giving some hope for future, the real GCF in farm sector has increased at double-digit in 2005-06 and 2006-07, almost thrice the rate in earlier five years. Incidentally, we had to take here GCF as GCFC data are not available by industry.
The industrial sector comprising mining, manufacturing, construction and electricity, too suffered gradual erosion in the share from a high of 57 per cent in 1996-97 and 1997-98 to a low of 36 per cent in the low investment year of 2001-02, though in 2005-06 and 2006-07, it recovered most of the losses with the share rising to 56 per cent by 2006-07. Electricity, which has emerged as a major constraint to high GDP growth, has found its share in capex slip from 12 per cent in 1993-94 to 6 per cent by 2006-07. Manufacturing too suffered share erosion from 44 per cent average during 1995-96 to 1997-98 to a low of 30 per cent in 2001-02, though the subsequent years have seen rebound with 2006-07 recording a share of 43 per cent.
In services, which gained in investment as in incomes, community, social and personal services (including public administration) upped their combined share in investment from 9 per cent to 15.2 per cent between 1993-94 and 2006-07. The rise in investment under public administration was due to massive investment under NHDP and other infrastructure projects through public exchequer. Transport sector including storage and communication accounted for 8 per cent of GCF in 2006-07, trade and hotels 3 per cent and banking and insurance etc 12 per cent.