Budget 2023: FM pins hopes on textbook play of capex multiplier

The decision to raise capital expenditure by 33 per cent appears to be primarily driven by this assumption.

How do you spot a revival in a broader economy? The signals are found in the neighbourhood markets and car showrooms. Household spending is a proxy for two broad things: people’s stable income; and their confidence in future income levels.

A family’s decision to buy a consumer durable product, such as a car or a house is primarily driven by what it thinks its future levels are likely to be. This is because most middle-class families buy houses and cars on loans. In the cases of houses, the loans are of a longer period, usually spanning 10-15 years. Therefore, consumer confidence in future income streams is as much an important component as their current income levels.

Household income levels, present and future, reflect the economic activity in the broader business landscape. Companies decide to invest when they foresee greater demand for their products. This prompts them to expand, invest in new capacity lines and hire more people. The resultant employment generation leads to higher income levels, encouraging people to spend more.

Finance Minister Nirmala Sitharaman has placed her bets in the Budget for 2023-24 on this textbook assumption of economic multiplier to play out in the real economy. The decision to raise capital expenditure by 33 per cent — from Rs 7.5 lakh crore in 2022-23 to Rs 10 lakh crore in 2023-24 — appears to be primarily driven by this assumption.

The government’s policy of focusing on capital expenditure, and relying heavily on the Keynesian principle that higher public investment in infrastructure projects will unleash strong economic multipliers, finds reflection in the Budget.

Highways and ports are long-gestation projects, but can spin jobs, with cascading benefits on intermediate industries, such as cement and steel. The government’s decision to do the heavy lifting on capital expenditure appears to be 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.

“This substantial increase in recent years is central to the government’s efforts to enhance growth potential and job creation, crowd-in private investments, and provide a cushion against global headwinds. The direct capital investment by the Centre is complemented by the provision made for creation of capital assets through Grants-in-Aid to States. The ‘Effective Capital Expenditure’ of the Centre is budgeted at Rs 13.7 lakh crore, which will be 4.5 per cent of GDP,” the finance minister said in her Budget speech.

The finance minister has pencilled in a 10.5 per cent nominal gross domestic product (GDP) growth for 2023-24. If the current downward trends in inflation levels were to persist, it may not be off the mark to assume a GDP deflator of about 4.5-5 per cent during the year, implying that India’s real or inflation-adjusted GDP could grow at about 6 per cent in 2023-24, somewhere closer to the lower band of the Economic Survey’s projections.

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The Statements of Fiscal Policy in the Budget documents state that India’s growth next year will be supported by “solid domestic demand and a pick-up in capital investment”. There are, however, headwinds that need factoring in. These include: a rebound in the Chinese economy, persistently shaky global financial conditions, uncertainties and shifting geo-political developments, disorder in global trade, and knock-on effects on inflation due to rising crude oil prices.

The Budget, in the Statements of Fiscal Policy, explicitly states this. “Near-time downside risks to stability and growth emanate from global inflationary pressures, tightening global financial conditions, prolonged supply chain disruptions, global trade slowdown, etc. A rapid return to normalcy in the Chinese economy would lead to higher demand for commodities, such as crude oil, industrial metals, coal, etc. That would raise input costs and aggravate India's external deficit.”

Ceteris paribus, or other things remaining the same, however, the finance minister’s fiscal and investment assumptions could play out as anticipated, unless hit by hitherto unknown global policy shocks.

Gaurav Choudhury is consulting editor, NW18. Views are personal and do not represent the stand of this publication.