The slowdown in Indian economy over the past five years or so has been accompanied by a sharp decline in private investment. Fixed capital formation, a good measure of value added through capital investments, in the private sector nosedived by 40% from being 14.26% of GDP in 2007-08 to 8.46% in 2012-13. Reviving this should be central to any attempt at improving the economy.
Public sector GFCF too declined in this period from 8.54% of GDP to 7.80% of GDP. Clearly the massive fiscal splurge in this period went into subsidies and doles rather than financing capital investments. As the combined squeeze of both started to bite, it is no surprise that supply-side inflationary pressures showed up.
In fact, much of this (and a host of other fundamentals) reflects the problems posed by deep underlying structural issues - infrastructure bottlenecks, rigidities in labor market, tough business environment, accessing credit for small enterprises, and so on. Clearly, a second generation of economic reforms, long overdue, are necessary to alleviate these constraints. Even with aggressive pursuit of reforms, it is going to take time.
As the graph shows, the decline started in 2008, coinciding with the global financial crisis and the resultant recession/slowdown. It has fallen unabated since then. In fact, even the steep rise in investment from 2004-05 was driven by the headwinds from the economic boom during the period which papered over these fundamental problems.