Capex boost may push India economy on higher growth trajectory, ground set for pick up in investment cycle

India’s economy has been stalled by the pandemic, but there has been a quick rebound after the slump on public investment, leading to a recovery in gross fixed capital formation (GFCF) in FY22. According to CareEdge, the economy could grow faster in the longer term if investments are accompanied by their strong multiplier effect. At 60%, consumption is the largest contributor to India’s GDP. However, at this point in time this can only provide short-term impetus for the economy. In order to achieve a high growth course, the government’s strong investment boost should help, as it will ensure an upswing in the investment cycle with its strong multiplier effect.

“The center’s strong investment boost should contribute to an upswing in the investment cycle in the economy. State governments have also budgeted for strong investment growth in FY23. While investment from state governments has been weak so far, it could improve in the coming months as the center disburses interest-free loans,” said Rajani Sinha, chief economist, CareEdge. As for the private sector, deleveraging has taken place in recent years. “With a capacity utilization rate of over 75%, the course has been set for a revival of the investment cycle. The fall in commodity prices and inflation is another factor in favor of a recovery in the investment cycle. The most critical aspect now would be sustaining the recovery in demand that we are seeing,” Sinha added.

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It must be noted that the central government forecast strong investment growth of 25% to Rs 7.5 crore for FY23 and has already achieved 27.8% (Rs 2.1 crore) of the investment target in the first four months ( April-July) of the current financial year. Overall, the center’s capital expenditures increased by 62.5% year-on-year in the April-July period of the current fiscal year, with roads and highways, railways and defense being the top three investment areas. However, according to the CareEdge report, defense’s share of total spending has fallen over the years, while roads and rail’s has risen. From April to July, investments in railways, roads and highways increased by 102.7% and 66.8%, respectively. These two sectors accounted for more than 60% of total central government investment spending.

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CareEdge analysts expect government programs like the National Monetization Pipeline (NMP), Gati Shakti and PLI to help the economy’s investment cycle recover. The center’s capital spending to date is encouraging and state governments have also projected high capital spending with total projected capital spending for 21 states at Rs 6 lakh crore, 39% higher than last year. “Although state government investment has been slow to pick up steam, central government disbursements of interest-free loans in the coming months should help state governments recover their investment cycle,” said CareEdge.

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According to the report, India Inc.’s revival of capital spending is skewed as some sectors and large players are sourcing the bulk of the investment, while the small and medium-sized players are still hesitating amidst all the economic uncertainties. “As capacity utilization improves, we will likely see increased participation from the other smaller players. The critical aspect will be maintaining demand momentum,” the report said, adding that the global slowdown, volatile commodity prices and tightening financial conditions would dampen investment sentiment.

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