Moneycontrol Pro Panorama | As government capex peaks, will private sector take over?

The government’s expectation is that the private sector will take over the reins of capex. Will this happen?

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A message that comes through clearly from the Interim Budget 2024 is that the government is done with the heavy lifting to keep economic activity on course. In keeping with the glide path to arrive at the much-lauded fiscal deficit of 5.1 per cent in FY2025 and even better 4.5 per cent in FY2026, there was restraint in government capex. The 11 per cent expansion in capex growth on the FY2024 estimates and around 15-16 per cent on the revised estimates for FY2024 are indeed the best that was possible.

The government’s expectation is that the private sector will take over the reins of capex. Will this happen? And if so, how soon? Indeed, Finance Minister Nirmala Sitharaman evocatively mentioned in her Budget speech that private investments are happening on scale. This may not be unlikely in the long term given the conviction the world has in India growing at the fastest rate in the coming years.

But there are reasons to believe that private sector investments could take longer than expected.

One, per the Reserve Bank of India’s January 2024 report, credit growth to industry at 8.1 per cent year-on-year (y-o-y) in December 2023 was lower than 8.6 per cent in December 2022. In fact, credit to large industries and also to ‘basic metal & metal products, ‘chemicals & chemical products’ and ‘infrastructure’ decelerated.

Two, the December quarter results of most manufacturing companies reported a performance beat that was driven more on account of lower costs than sales expansion. In fact, the lead discretionary spend indicators such as auto and FMCGs saw subdued sales growth.

In this context, the Budget fell short on expectations of incentives to spur private capex. “More than sops, employment generation which follows private capital expenditure, is expected to help pull up rural consumption,” says Ananya Roy in this article. Some industry veterans state that in its quest for fiscal consolidation, the government steered clear of putting money in citizen’s pockets. The lack of rural incentives may exacerbate the already languishing demand for goods and services from this segment.

Three, the order flows of most infrastructure-linked companies that drive capex in core sectors too were subdued in the recent quarterly results. This is unlikely to improve in the near term due to elections round the corner.

Of course, the hope is that lower borrowings of the government will finally nudge the RBI to lower rates that could bring a whiff of optimism both in companies and in consumers. And, if the present government is back for another term, it has chances to alter any misses in the July Budget.

The strong rebound in the markets suggests that the Government has won over  investors with its trick and treat approach. The treat surely is the fiscal glide path, while the trick is passing the baton of capex to the private sector, which may however, take time.

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Vatsala Kamat
Moneycontrol Pro