India has long been waiting for a revival of its investment cycle. Investment rate (gross capital formation to GDP) has fallen by almost eight percentage points from around 40% in FY08 to 32% in FY15. Economists have time and again reiterated that for growth to be sustainable, India needs a revival of its capex cycle. As per conventional neoclassical economics, lower interest rates should spur investment and hence growth. But what if the private sector does not borrow despite access to cheaper credit? In other words, what if the transmission mechanism between the banking system and real economy breaks down? Before we delve into this, let’s look at how the investment cycle has behaved over...
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