On the face of it a 6-6.8 percent growth, which the Economic Survey for 2022-23 has projected, seems a trifle underwhelming for India. The pandemic years aside, a sub-7 percent growth in India’s real or inflation-adjusted gross domestic product (GDP) will be considered sub-par.
But, in 2023 and for a couple of years beyond, a 6 percent-plus growth rate would rank any economy among the top-tiers in the pantheon.
India will remain one of the major engines of global growth, the Economic Survey has projected, primarily because it would stand out for its pace and steadiness of expansion amid a choppy world economic environment.
Betting On Infrastructure
What makes the Survey, drafted by Chief Economic Adviser V Anantha Nageswaran and his team, so bullish about India’s prospects? There are a few clues, and cues, in the Survey, often described as the government’s official report on the state of the economy.
The survey describes this as “a reflection of India’s underlying economic resilience; of its ability to recoup, renew and re-energise the growth drivers of the economy”.
A large part of the cheerfulness draws from the government’s policy of focusing on capital expenditure, relying heavily on the Keynesian textbook assumption that higher public (read government) investment in infrastructure projects will unleash strong economic multipliers.
By definition, the resultant impact of infrastructure projects always shows up with a time lag. Highways and ports are long gestation projects, but can spin jobs, with cascading benefits on intermediate industries such as cement and steel.
Government’s Heavy Lifting
The government’s decision to do the heavy lifting on capital expenditure appears to be a part of the well-crafted medium-term strategy to not just accelerate the pace of infrastructure project execution, but also to trigger a cycle of private sector investment, or what economists sometimes describe as the “crowding in” phenomenon.
Higher government spending in sectors activates a cycle of higher demand in other industries, raising output and incomes. This creates opportunities for the private sector, prompting them to invest more.
The Economic Survey explicitly states the government’s intent to walk the talk on frontloading investment in infrastructure to initiate a “crowding in” effect of private sector investment.
The Centre's capital expenditure has steadily increased from a long-term average of 1.7 percent of GDP (FY09 to FY20) to 2.5 percent of GDP in FY22. The Centre has also incentivised the state governments through interest-free loans and enhanced borrowing ceilings to prioritise their spending on capital expenditure.
In absolute terms, the Centre had budgeted an unprecedented Rs 7.5 lakh crore of capital expenditure for FY23, of which more than 59.6 percent has been spent from April to November 2022
“It (the strategy on higher government expenditure in the last two budgets) was part of a strategic package aimed at crowding-in private investment into an economic landscape broadened by the vacation of non-strategic PSEs (disinvestment) and idling public sector assets”, the Survey said, demonstrating evidence to illustrate that this has broadly played out on anticipated lines.
Private Sector Is Responding
There is a noticeable rise in the rapidity of private sector investment over the last 12 months, including planned investments with leading industry CEOs stating that their companies have drawn up plans for adding capacity lines to cater to greater demand.
According to Axis Bank Business and Economic Research, capital expenditure by the corporate sector increased to Rs 3.3 lakh crore in the first half of 2022-23, driven by heavy investments in electricity, steel, chemicals, auto and pharmaceuticals sectors.
“Thankfully, the private sector has all the necessary preconditions lined up to step up to the plate and do the capex heavy lifting. Their internal resource generation is good, capacity utilisation is high, and the demand outlook continues to improve. Capital markets are willing to finance new investments, as are financial institutions,” it says.
The essential metric to gauge this is to examine construction activity, which the survey says, has, in general, “significantly risen in 2023 as the much-enlarged capital budget (Capex) of the central government and its public sector enterprises is rapidly being deployed. Going by the Capex multiplier estimated for the country, the economic output of the country is set to increase by at least four times the amount of Capex”.
The healthier news is that even the states, in aggregate, are also performing well with their Capex plans.
Short of any unforeseen unknown, this could well be India’s year to cement its status as the most powerful global growth locomotive.
Gaurav Choudhury is consulting editor, NW18. Views are personal and do not represent the stand of this publication.
