Last week, an article on the state of the economy by the Reserve Bank of India (RBI) staff acknowledged “a shift from consumption to investment,” and said that this underpinned the upside surprise in the National Statistical Office’s first advance estimates of the national income (real GDP growth of 7.3%) for FY24.
The authors including deputy governor Michael Debabrata Patra talked about the government’s thrust on capex “starting” to crowd-in private investment, and the “ebullience in residential housing.” The rate of real fixed investment is at a historic high (of nearly 35%) in 2023-24 and this “augurs well for enhancing the productive capacity of the economy and hence its potential,” they noted.
In a recent interview to a news agency, Monetary Policy Committee (MPC) member Jayanth R Varma was more nuanced, in saying that, capacity utilisation has been “slowly creeping up” and approaching levels that prompt the private sector to undertake capital expenditure “at least in some sectors.”
However, all this optimism may require to be discounted for a host of reasons. The current spurt in investment rate—the ratio of gross fixed capital formation to the GDP—is predominantly the result of the peak reached by public investments. Apparently, it has very little to do with any small, incremental rise in private investments.
To be sure, the Centre’s Budget capex grew an unprecedented 43% in the first half of this fiscal; large central public sector enterprises, the NHAI and the Railways have seen combined annual investment growth of 22.4% in April-December; states too have pitched in with 45% year-on-year growth in capex outlay in April-November, thanks to the Centre’s special capex loan scheme, faster tax devolution, and fairly strong “own tax revenues.”
The pace of government capex would inevitably moderate now. This is because any serious digression from the demanding medium-term fiscal glide path is unaffordable for the country. Incremental capex by the Centre, for instance, may be limited to less than Rs 1 trillion each in FY25 and FY26, compared with Rs 2.7 trillion (Budget Estimate) in the current fiscal. The last few quarters have witnessed the odd trend of public capex surpassing private investments in absolute terms (historically, even when private investments fell, this wasn’t the case).
As per the CMIE, projects completed in the nine quarters to Q3FY24 in the public sector was nearly 1.5 times those in private sector in value terms. Private-sector project announcements in the period were, however, 3.5 times the government sector’s. Clearly, the private sector hasn’t yet picked up the baton from the government even as the latter is now left with much reduced fiscal firepower.
True, corporate “profitability is rising quarter after quarter,” but it would be implausible to expect this to induce much fixed asset creation, when consumption is languishing. The current spell of robust corporate profitability is largely due to lower input costs, benign tax rates, and depletion of household savings. The marginalisation of a section of the unlisted firms and small enterprises has also bolstered the bottom lines of large listed companies.
Durable signs of a private investment cycle is a reasonably leveraged corporate sector, and a moderately indebted household sector. The current account deficit is modest now, which implies limited inflow of foreign savings. At this point, scarce and unevenly distributed domestic savings would hardly suffice to finance (high) economic growth. More steps are urgently required to encourage household savings and corporate investments.