How Gross Fixed Capital Formation (GFCF) Affects Investment Cycles
Issue #05 GFCF as a %age of GDP in India: An Increasing Trend, Expected at 30% in FY24
Gross Fixed Capital Formation (GFCF) is simply the money spent on buying things that help the economy grow, like buildings, roads, and factories. There are three main groups that make these investments:
Households: People like you and me, who invest in things like houses or cars.
Government: The government invests in public things like roads, airports, and schools.
Private Companies: Businesses invest in expanding their operations, like building new factories or stores.
How Do Investment Cycles Work?
Investments don’t happen at a steady pace. Instead, they go through cycles:
Boom Period: When people are confident about the economy, they invest more, which drives up demand and prices.
Bust Period: Sometimes, too many investments are made too quickly, leading to an oversupply. This can cause prices to drop and make people stop investing.
Why Are Investment Cycles Important?
When the economy is doing well, people invest more, leading to growth. But if too much is invested too fast, it can lead to problems, like falling prices or unused resources.
How Infrastructure Drives Economic Growth
Job Opportunities: Good roads and power help people find work in smaller cities, reducing the need to migrate to big cities.
Lower Business Costs: Companies save money by setting up in affordable locations with improved infrastructure.
Faster Transportation: Efficient roads and railways make moving goods cheaper and quicker.
Boosts Industries: Infrastructure supports businesses like manufacturing, retail, and services, creating a chain of economic growth.
My View
Investment cycles are a normal part of the economy. By understanding them, we can get a better idea of when the economy will grow or slow down.
Investment cycles usually last about 10 years. I think we are in the middle of such a cycle right now, and it may continue until 2030, especially because of big projects like the Golden Quadrilateral in India.