Page 41 - Policy Economic Report - September 2026

POLICY AND ECONOMIC
OIL & GAS MARKET

Lessons from Economics

Capitalization & Economic Growth

Economic growth refers to an increase in the production of goods and services in an economy over time.
Capital plays an important role in this process by supporting investment, improving productivity and
creating employment.

Capital Formation: Capital formation is the process of adding to an economy’s stock of productive assets.
When a business purchases new machinery, a farmer buys a tractor or the government builds roads,
productive capacity can increase. These investments enable businesses to expand, improve efficiency and
produce more goods and services. Gross Fixed Capital Formation (GFCF) measures investment in fixed
assets such as buildings, machinery, transport equipment and infrastructure. India's GFCF has been an
important component of domestic economic activity, reflecting investments by both the public and
private sectors. GFCF is currently 34.3% of India's GDP in Q1 FY27, driving 7.8% growth.

A useful distinction is between gross and net investment. Gross investment is the total investment made
during a period, while depreciation represents the loss in value of existing assets due to wear and tear or
obsolescence. Net investment is calculated by subtracting depreciation from gross investment. Positive
net investment indicates an increase in the economy's productive capital stock.

Market Capitalization: In business finance, capitalization refers to the way a company is financed through
equity and debt. In the stock market, market capitalization (market cap) represents the total market value
of a company's outstanding shares. It is calculated by multiplying the current share price by the total
number of outstanding shares.

Market capitalization reflects investors' valuation of listed companies and provides an indication of the
size of a country's equity market. However, it is different from GDP, which measures the value of goods
and services produced within an economy over a specified period. A rise in market capitalization does not
necessarily translate into an equivalent increase in economic output.

Capital Investment and India's Economic Growth

India's economic growth is supported by investment in infrastructure, manufacturing, energy,
transportation and digital connectivity. Government capital expenditure on roads, railways, ports and
other infrastructure can improve productivity and encourage private investment. The Union
Government's capital expenditure outlay for FY 2026–27 is ?12.2 lakh crore, reflecting the emphasis on
infrastructure-led development.

Private-sector investment, supported by banks and capital markets, also contributes to capacity
expansion, technological advancement and employment generation. A favourable investment
environment, supported by financial stability, skilled labour and policy certainty, can help convert financial
resources into productive assets.

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