“An uptick in consumption in H2 will spur investments”

The private sector’s capex share in the country’s GDP, which had risen to 23.8% in FY23, is only going to increase further going forward, due to several second-generation reforms which the government will implement, a pick-up in consumption levels, and India’s intergation with global value chains, Sanjiv Puri, president, Confederation of Indian Industry (CII) told Priyansh Verma in an interview. He said as per industry’s internal estimates, the capacity utilisation levels of many sectors are upwards of 75%, which will led itself to fresh investments. Excerpts:

Private sector capex hasn’t picked up to an extent that it should. What’s the way forward?

The private capex is in a positive trajectory. It had dropped to 20.7%, as a share of GDP in 2020-21, but in 2022-23, it rose to 23.8%, and this is higher than the pre-Covid level. I feel it will sustain, and that’s because of a number of enablers are in place – rationalisation of corporate tax, the PLI scheme, the ease of doing business, stress on logistics etc. Also, India is slowly integrating itself with global value chains. There is certainly an interest in supply chain diversification.

With certain other interventions, such as more FTAs being signed and second-generation reforms being implemented, the private capex will only rise from hereon. Beides, India is a large consumption-driven economy, so we do see that overtime consumption should do better. Monsoon would be better this year, so by the second half of the year will see an uptick in consumption, and that would also aid investments.

How is the rural consumption going to be this year?

Industry has been reporting “green shoots” of recovery. With an above normal monsoon, and better farm income, the consumption should improve. We recommend that public capex’s allocation towards rural areas should increase – in terms of housing, irrigation, warehousing, or infrastructure for physical connectivity. All of this will provide impetus to rural consumption, develop the rural economy and increase its productive capacity.

The FMCG (fast moving consumer goods) industry is quite hopeful that consumption would pick up in the second half of FY25. An improved monsoon is also expected to result in moderate levels of food inflation.

Do you recommend an increase in outlay of public capex in the full Budget?

We suggest that there should be an year-on-year growth of 25% in the public capex outlay in the Budget. As per the interim Budget estimates, the growth is coming in at around 17% (over RE FY24) This is because the investment in infrastructure has a lot of multipliers, it makes the economy competitive.

The rise in public capex also benefits private capex, both directly and indirectly. Directly because sectors related to infrastructure get a boost, and second it creates jobs and augments consumption, which helps to start a virtuous cycle.

The current capacity utilisation stands around 75%, as per the RBI survey. What is the industry’s outlook?

 As per our internal surveys, we believe capacity utilisation levels across the majority of sectors are upwards of 75%. Some sectors are at 80%, some at 90% (such as cement, steel, and automobiles).

Infrastructure linked sectors, and electronics linked sectors–such as renewables, EVs, will record investments.

What’s your assessment of the PLI scheme?

The available data, and industry feedback tells us that the scheme is working well. It has led to job creation and investments. But there is scope for enhancement. We expect the scheme should cover sectors that are labour intensive, such as toys, apparel, retail, media and tourism.

What’s your recommendation for the full Budget? What should be the focus areas of the government?

Some of our key recommendations are: increase outlay towards public capex (25% y-o-y growth), build a roadmap for increasing investments towards health and education sectors (respectively to 3% and 6% of the GDP), and bring in more resources for skilling.

We recommend the government to launch employment linked incentive schemes with appropriate outcome indicators for labour intensive & high growth potential sectors. Also, the big reforms of land, labour, power, along are very important. The labour codes should be notified as soon as possible. It simplifies regulation, unlocks the productive potential in that segment.

We also recommend the rationalisation of capital gains tax structure, by bringing about consistency in tax rates and holding periods for different types of instruments.

Do you believe the Narendra Modi led-coalition government would make implementing big reforms a difficult task?

We believe the reform pace should only accelerate. Our forecast of 8% growth in FY25, is also based on the assumption that the reform pace will only accelerate. The earlier set of policy interventions have delivered, and that certainly should be reassuring to everybody that this is the right path.

Some FMCG companies are turning to premiumisation in a big way across categories to grow their business. How do you view this secular trend of premiumisation?

India, that’s Bharat, is a very aspirational society now and that’s reflecting in the choice of premiumisation. This will only continue.