Govt has spent, corporates have held back; India's next growth phase hinges on private investment: DSP

India's economic fundamentals are stronger than they have been through much of the past two decades, but the country's next phase of growth will depend less on government spending and more on whether private companies regain the confidence to invest, according to a report by DSP Mutual Fund.

In its latest Navigator report, DSP argues that India is no longer grappling with weak balance sheets—a problem that defined earlier economic cycles. Instead, it says the challenge has shifted to converting healthy household, corporate and government finances into faster and broader-based growth.

The report sums up the current cycle in one line:

"The government has already stepped up. Corporates have not followed. Households are not in a position to take on materially more leverage."

Government spending has led the recovery

DSP notes that the government has already played an important role in supporting the economy through elevated capital expenditure.

Government capex currently stands at 3.2% of GDP, above the average seen during India's strong growth phase between FY03 and FY08. At the same time, corporate balance sheets are among the healthiest in two decades, with debt levels and debt servicing costs remaining well below previous peaks.

Yet private investment has failed to respond.

Private corporate gross fixed capital formation has slipped to 3.8% of GDP, compared with 6.4%-6.8% during India's previous investment boom, despite companies having ample capacity to borrow and invest.

"The problem isn't leverage. The problem is willingness," the report says, arguing that businesses continue to hold back because demand visibility remains limited.

Households are spending—but increasingly through debt

The report also points to a growing imbalance in household finances.

Private consumption remains elevated at around 61.4% of GDP, but wage growth has slowed sharply compared with the early-2000s expansion. Compensation growth has eased to an 11.1% three-year compound annual growth rate, well below the high-teen levels seen during FY03-FY08.

Meanwhile, household debt has climbed to a record 0.55 times disposable income.

To put that simply, DSP argues that many households are continuing to spend, but a larger portion of that spending is now being supported by borrowing rather than rising incomes. That means consumption alone may not be strong enough to trigger the next investment cycle.

Foreign capital missing despite healthy fundamentals

The report identifies another unusual feature of the current economic cycle.

India's external position appears stronger than in many previous growth phases. Foreign exchange reserves remain comfortable, the current account deficit is relatively contained despite a persistent oil import bill, and services exports have risen to a record 5.4% of GDP, while remittances remain close to historical highs.

Yet foreign capital has remained subdued.

FDI inflows are running at just 0.2% of GDP, below historical averages, while portfolio flows have turned negative.

"This is perhaps the most unusual feature of the current cycle," DSP said, adding that foreign capital is weak "not because India needs fixing, but despite strong reserves, low inflation, healthier corporate balance sheets and sustained public investment."

The report believes this could change if valuations become more attractive and debt inflows remain firm.

Markets already expecting a stronger recovery

While the economy's balance sheets remain healthy, DSP argues equity markets are already pricing in a much stronger recovery than the underlying data currently supports.

Revenue growth has slowed to 8.2%, placing it near the 17th percentile of its historical range over the past decade. Earnings growth, at 9%, has held up better largely because companies have protected profit margins through cost control rather than stronger sales. Return on equity remains healthy at 14.8%, while EBITDA margins are broadly in line with historical averages.

Despite this, market valuations remain elevated.

Forward price-to-earnings multiples, price-to-book ratios and EV/EBITDA all lie between the 67th and 71st percentiles of their historical ranges. According to DSP, this marks only the third time in two decades that market expectations have significantly outpaced underlying growth.

"Growth sits in the bottom third of its 10-year range; valuations sit in the top third," the report noted.

What can restart the cycle?

DSP believes the ingredients for stronger growth already exist.

The report says lower interest rates, stronger income growth, a revival in foreign capital inflows and, most importantly, a pickup in private corporate investment could reinforce one another and kick-start a fresh investment cycle.

It concludes that India's challenge has fundamentally changed.

"India's challenge is no longer repairing balance sheets. It is converting strong balance sheets into stronger growth," the report said.

That means the next chapter of India's growth story is unlikely to be written by the government alone. With public investment already running at elevated levels and households carrying record debt, the baton now passes to corporate India—and whether businesses choose to invest may determine how quickly the economy enters its next expansion cycle.