Domestic demand would revive as consumer expenditure is expected to rise in the September-December festival season, providing further growth momentum to the Indian economy.
The growth of India’s Gross Domestic Product (GDP) at 7.8% in the April-June quarter of FY 24, (compared to 13.1% growth rate seen in Q1 of FY 2022-23) remains on expected lines. Real GDP or GDP at Constant (2011-12) Prices in Q1 2023-24 is estimated to attain a level of Rs 40.37 lakh crore, as against Rs 37.44 lakh crore in Q1 2022-23. The Central government’s NSO office on 31 August 2023 released the GDP figures for the first quarter of the new financial year, which is marginally above the earlier estimates which predicted the economic growth to accelerate to 7.7% in the June quarter. Agriculture shows positive growth at 3.5% in (Apr-June) FY24 compared to corresponding period of FY23. Financial and services sector show strong growth at 12.2% compared to 8.5% in previous period, whereas construction sector growth declined to 7.9%. It is also praiseworthy to note that the eight core industries show overall 8% growth. All the sectors have shown impressive growth rates, coal has shown the highest growth rate at 14.9% followed by steel at 13.5%.
A study by the National Institute of Public Finance and Policy (The Monthly Economic Report (July 2023), The Ministry of Finance, GoI) highlights that every rupee spent on the capital expenditure (capex) leads to a cumulative multiplier effect of Rs 4.8 in the economy, while for the revenue expenditure, every rupee of outlay leads to a cumulative multiplier of 0.96. Morgan Stanley, in its report, “How India has transformed in Less than a Decade”, featured that the steady increase in manufacturing and capex as a percentage of GDP is likely to result in a new cycle in manufacturing and capex. It has estimated the share of both in GDP to rise by approximately 5% by 2031.
The Gross Fixed Capital Expenditure (GFCF) as per cent of GDP appears to be at 34% in FY23. The share of the Union Government’s capital expenditure in total expenditure has increased from 12.3% in FY18 to 22.4% in FY24 (BE). The Union government’s capital expenditure rose by 59% in Q1 of FY24, signifying a marked improvement in the quality of the Centre’s overall spending.
The Centre has incentivised state governments in enhancing their capex via “The Scheme for Special Assistance to States for Capital Investment” ensures that investments by states are spread evenly throughout the year. Nevertheless, states need to kickstart their capex further, as 25 state governments managed to spend only 76.2% or Rs 5.71 lakh crore from their planned capex of Rs 7.49 lakh crore for 2022-23.
Moreover, the Production-Linked Incentive (PLI) scheme is providing capital expenditure-linked incentives to 14 key sectors. The PM Gatishakti scheme, coupled with the National Infrastructure Pipeline (NIP), is expected to encourage private-sector participation in creating new infrastructure and help in onboarding major private-sector infrastructure players. The strong balance sheet of the private sector, with augmented capex by the government, is expected to increase the prospects for the private sector to take part in infrastructure initiatives such as highways, construction of new roads, housing, and drinking water projects, among others. A pick-up in capex expenditure has ensured that infrastructure-linked sectors, such as roads, railways, telecom etc., have seen a jump in the disbursement of bank credit.
According to the RBI’s Order Books, Inventories and Capacity Utilisation Survey, capacity utilisation (CU) in the manufacturing sector increased for the third successive quarter to 76.3% in Q4 of FY23 from 74.3% noted in the previous quarter. Bank credit to the infrastructure sector was 1.7% higher in Q1 of FY24, compared to the corresponding period of the previous year, with the most substantial increase in credit availability to cargo ports and airports.
According to the RBI August 2023 Bulletin, the near-term outlook for private investment activity in India is gauged from project investment proposals of the private corporate sector. A sustained pick-up in bank credit in recent period, rising capacity utilisation, improved business outlook and demand conditions and various government policy initiatives to support investment activities provided a conducive environment for the private corporates to undertake fresh capital all India investment. The envisaged total cost of the projects financed by banks/financial institutions reached a new peak during 2022-23 since 2014-15. Of the total capital investment during 2022-23, about 40 % is expected to be spent in 2023-24. During 2022-23, 393 companies, which did not avail of any financing from banks/FIs for capex projects, raised Rs 82,448 crore through ECBs, while 42 other companies raised Rs 3,629 crore through domestic equity issues under the IPO route for funding their capex needs. Overall, investment plans of 982 projects were made during 2022-23, with record capital outlay of Rs 3,52,624 crore–higher than the level seen since 2014-15, as against 791 projects in 2021-22 with investment intentions of Rs 1,96,445 crore (according to a Working Paper on India’s Private Investment published in the RBI’s August 2023 Bulletin).
There are certain strains in the exportable segment due to global slowdown and subdued demand for Indian traditional exportable e.g., textiles, coir products etc from the European markets. Demand for Indian exports have seen downward trends in major markets like US and China as such economies are going through turbulent times. However, the domestic demand in the Indian markets would revive as the festival season will pan out during September-December, and consumer expenditure is likely picking up, providing further growth momentum to the Indian economy.
Vipin Malik is Chairman & Mentor, Infomerics Ratings. Sankhanath Bandyopadhyay is an economist at Infomerics Ratings.