India’s economy has been mired by the pandemic, however, there has been a rapid recovery from the crisis thanks to public investment, which has led to a rebound in gross fixed capital formation (GFCF) over the past year. 22. According to CareEdge, the economy could grow at a higher rate in the longer term if capital spending comes into play with its strong multiplier effect. At 60%, consumption is the main contributor to India’s GDP. However, in the current environment, this can only stimulate the economy in the short term. In order to achieve a high growth trajectory, the strong push in government investment spending should help as it will provide an upturn in the investment cycle with its strong multiplier effect.
“The strong investment push from the center should contribute to a resumption of the investment cycle in the economy. State governments have also forecast strong capital spending growth in FY23. Although state government capital spending has been weak so far, it could improve in the coming months. come with disbursements of interest-free loans by the Center,” said Rajani Sinha, Chief Economist, CareEdge. As far as the private sector is concerned, there has been deleveraging in recent years. “Now that the level of capacity utilization exceeds 75%, the conditions are in place for a resumption of the investment cycle. The easing of commodity prices and inflation is another favorable factor for a resumption of the investment cycle. The most critical aspect now would be sustaining the recovery in demand that we are seeing,” Sinha added.
It should be noted that for FY23, the central government has forecast strong investment growth of 25% to Rs 7.5 lakh crore, and it has already reached 27.8% (Rs 2.1 lakh crore) of the investment objective during the first four months (April-July) of the current financial year. Overall, the Center’s capital expenditures increased by 62.5% year-on-year during the April-July period of the current fiscal year, with roads and highways, railways and defense being the three main areas of investment. However, defense’s share of total spending has declined over the years, while roads and railroads have increased, according to the CareEdge report. During the April-July period, capital spending on railways, roads and highways jumped 102.7% and 66.8%, respectively. These two sectors accounted for more than 60% of total central government capital expenditure.
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CareEdge analysts expect government programs such as the National Monetization Pipeline (NMP), Gati Shakti and PLI to help drive the investment cycle back into the economy. So far, capital expenditure from the Center is encouraging, and state governments have also budgeted strong capital expenditure, with overall capital expenditure budgeted for 21 states at Rs 6 lakh crore, 39% higher than last year. “Although state government investment has been slow to pick up, the disbursement of interest-free loans by the central government is expected to contribute to the rebound in the state government investment cycle in the coming months,” said CareEdge.
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According to the report, India Inc.’s investment recovery is skewed, with certain sectors and large players bringing in the bulk of the investment, while small and medium-sized players are still hesitant amidst all the economic uncertainties. “As capacity utilization levels improve, we are likely to see increased participation from other smaller players. The critical aspect will be maintaining demand momentum,” the report said, adding that the global slowdown, the Commodity price volatility and tighter financial conditions would dampen investment sentiment.
