Corporate investment decisions are being significantly impacted by uneven demand, commodity price volatility, trade-related uncertainty due to heightened geopolitical tensions, and cheap imports, according to a paper prepared for the two-day banking conclave attended by FM Nirmala Sitharaman. As reported by The Times of India, the paper explained that large capital projects require confidence not only in current demand but also in future cash flow visibility. When pricing, input costs and end-market demand remain uncertain, companies often choose to defer investment, despite most large companies today possessing both borrowing capability and internal resources required for expansion. Recent analysis from the Economic Advisory Council to the Prime Minister reveals that aggregate corporate profits grew by roughly 21% in FY2023-24, while fresh fixed-asset creation grew by only about 6%, highlighting a significant gap between profitability and investment activity.
For the next investment cycle spanning FY27-FY31, average annual expenditure demand is expected to rise to ₹30 lakh crore from approximately ₹20 lakh crore during FY22 to FY26, according to the SBI Caps analysis. The government's capex-intentions survey shows that enterprises followed through on 96.3% of what they planned to spend in FY25, demonstrating execution capability. However, stated capex intentions for the coming year are down 16.5%, with manufacturing's share of that spending shrinking, as reported by Moneycontrol. The retreat is concentrated in sectors that matter significantly for employment — manufacturing, trade, hotels, construction and electricity. UNCTAD's World Investment Report 2026 shows similar patterns, with India's FDI inflows rising in 2025, even as the value of newly announced greenfield projects fell by about a third, with manufacturing project values roughly halving.
The current investment hesitancy stems from cooling returns businesses expect from the next rupee they invest, rather than the last one spent, according to the EAC-PM's modelling. Companies appear to be taking longer to recoup fresh capital spending, and what they earn on it once recouped seems to have softened. A significant portion of current borrowing is going towards refinancing existing debt rather than funding new capacity, suggesting the constraint may have less to do with money availability than confidence in returns. Geopolitical uncertainty — including the war in Ukraine, conflict involving Iran, tariff volatility and oil price swings — has made long-horizon capital decisions harder to underwrite with confidence. Additionally, there appears to be a broader rotation in global capital towards semiconductors, digital infrastructure, artificial intelligence, advanced manufacturing and energy-transition technologies, sometimes at the expense of traditional manufacturing capacity.
The analysis revealed distinct sectoral approaches to capital deployment, with metals being a high capex and high dividend sector, while pharma is seen as a low dividend, low capex sector. Manufacturing and infrastructure sectors are identified as high capex with low dividends, while IT and FMCG sectors prioritise dividends. The paper noted that capital deployment is expected to remain concentrated in sectors where structural demand growth, policy support and capacity constraints create a compelling case for fresh investments. However, recent data shows manufacturing's share of spending is shrinking, with the retreat concentrated in sectors that matter significantly for employment generation.
The next phase of private capex cycle will require a broader financing ecosystem as bank balance sheets are increasingly likely to not support future financing requirements, according to the SBI Caps paper. While banks are expected to remain the dominant funding source, they will be able to finance roughly 70% of the projected ₹85 lakh crore external funding over FY27-FY31. The paper recommended that debt capital markets, securitisation structures, alternative investment funds, pension and insurance capital, infrastructure investment trusts and foreign investors will need to play a larger role than they do today. For policymakers, the diagnosis may point towards measures aimed at improving returns rather than purely easing finance, including production-linked incentives, public investment designed to crowd in private capital, and faster contract enforcement that shortens the payback horizon businesses are weighing.
