Gross fixed capital formation (GFCF), a measure of investment demand in the economy, grew 2.6 percent in real terms in the October-December quarter from a year ago. The overall economy grew 0.4 percent in the third fiscal quarter, showed data released by the National Statistical Office on February 26.
The growth in investment demand is a turnaround from the 6.7 percent contraction seen in the second quarter. It is also a five-quarter high.
As a percentage of GDP, GFCF was 33 percent in the October-December quarter of 2020-21 compared to 31.8 percent in July-September quarter of 2020-21, and 32.3 percent a year ago.
"The sharp pickup in the capital spending of the Government of India has spurred the growth in gross fixed capital formation in Q3 FY2021, even as state government capital spending contracted, and private sector participation remained uneven and subdued," said Aditi Nayar, principal economist, ICRA.
A pick up in investment demand is key to a sustainable economic revival for India. However, GFCF growth had been slowing down even before the pandemic struck as overall economic growth slowed and the private sector lost confidence.
"Besides the overall uptick in the economy, the resurgence of GFCF in Q3 was also triggered by Capex in Central Government that increased year-on-year by 129 percent in October, 249 per cent in November and 62 percent in December, 2020.The fiscal multipliers associated with Capex are at least 3-4 times larger than Government Final Consumption Expenditure (GFCE) as Capex induces much higher consumption spending than normal income transfers," said Ministry of Finance in a statement.
The government has tried to make up for this by stepping up on its capital expenditure.
Realising the drop in investment activity and projects announcements due to slowing economy since 2019 which was further exacerbated due the COVID-19 pandemic, Finance Minister Nirmala Sitharaman had given a major boost to the infrastructure sector in Budget 2021 by announcing a slew of measures aimed at long-term growth and job creation.
For instance, the government extended Rs 111 lakh crore National Infrastructure Pipeline to cover 7,400 projects by 2025.
The minister also announced that a sum of Rs 20,000 crore has been provisioned in the Budget to launch the National Asset Monetisation Pipeline and a Development Financial Institution (DFI) which will have a lending target of Rs. 5 lakh crore.
She also increased the capital expenditure for 2021-22 by 34.5 percent to Rs 5.54 lakh crore.