Strategic Investment and Inclusive Growth in India: Unpacking the Interlinkages between Capital Formation and Employment Generation

Authors

  • Jitendra Kumar Sinha *

    Sr. Jt. Director & Head, Department of Planning & Development, Government of Bihar, Patna 800001, India †Retired

DOI:

https://doi.org/10.55121/jbep.v1i1.535

Keywords:

Gross Fixed Capital Formation , Investment , Economic Growth , Employment , Granger Causality

Abstract

Gross Fixed Capital Formation (GFCF) plays a vital role in economic development by enhancing productive capacity and stimulating growth. However, in India, a paradox persists: despite steady increases in GFCF and GDP, unemployment remains high, highlighting a disconnect between macroeconomic growth and labor market outcomes. This study examines the dynamic interrelationships among capital formation, economic growth, and employment in India during the post-reform period (1990–2024), marked by structural transformation, liberalization, and global shocks such as the COVID-19 pandemic. Using annual time-series data from official sources, the analysis employs the Johansen Cointegration Test and Vector Error Correction Model (VECM) to explore both long-run equilibrium and short-run dynamics. Findings confirm a statistically significant long-run cointegrating relationship among GFCF, GDP growth, and employment. Bidirectional causality is observed between growth and employment, while the causality from GFCF to growth is unidirectional and growth-induced. These results challenge conventional growth models that posit investment as the primary driver of output, instead suggesting that economic growth stimulates capital formation. The study also highlights persistent jobless growth, attributed to structural rigidities and capital-intensive production with low employment elasticity. It calls for a strategic reorientation of investment policy toward labor-intensive sectors such as agriculture, agro-processing, and rural infrastructure. Strengthening capital allocation in these areas is essential for enhancing the employment content of growth and achieving more inclusive and sustainable development. The study offers empirical insights to guide policymakers in designing growth strategies that align investment with employment generation in India’s evolving economic context.

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Vol. 1 No. 1 (May 2025)

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