The thrust laid by the government on capital expenditure (investment) over the last few years aided post-Covid recovery and ensured support to the growth momentum.
Given the uncertainty amidst persisting global headwinds, the government’s thrust on public capex on physical, social and digital infrastructure will likely continue, but at a moderate pace in the coming years.
The public sector–the Central government, states, and central public sector enterprises (CPSEs) –will likely invest around Rs 27.5 lakh crore 2025-26, a sub-10 per cent growth for the second consecutive year after registering 15-16 per cent growth between FY22 and FY24, data indicates. The moderation in pace of public capex is due to several factors including capacity constraints after investment acceleration in recent years. Now, public capex growth will likely stabilise at a single-digit level.
For example, the Centre had set a capex target of Rs 11.11 lakh crore for 2024-25, a 17 per cent increase over Rs 9.5 lakh crore achieved in 2023-24. However, data indicates that actual investment could be around Rs 10 lakh crore during the year, translating to a 5.2 per cent growth.
This is a far cry from the average of 30 per cent growth seen in the Centre’s capex between FY22 and FY24, as it adopted an investment-led growth strategy, taking such productive spending to a desirable 3 per cent of GDP for the first time in FY24.
Despite the support from the Centre by way of liberal capex loans, states’ investment likely fell by nearly 7 per cent on-year in April-November of the current financial year, while their borrowings dipped by 4 per cent, reflecting the continuing slack.
Going by the trend so far, the states in aggregate may invest around Rs 8 lakh crore in FY25, the same as in FY24. They might increase investment by about 10% to Rs 8.8 lakh crore in FY26.
Private sector capex has improved in recent months in several sectors of the economy. Manufacturing capacity utilization is now somewhere around 75 per cent and that’s a very sweet spot for the industry to step up investment to expand capacity.
Notwithstanding all the issues that India’s corporate sector may have with the government on taxes, the cost of capital and procedures, firms have never had it so good as it has in the last four years.
Indian private sector profitability was at a 15-year high of 4.8 per cent of GDP in March 2024, which was impressive given post-COVID challenges and the difficult global environment. The previous high was 5.2 per cent of GDP profit after tax in March 2008, which was a boom era.
Capital formation as a share of GDP was 27.3 per cent pre-Covid because of balance sheet issues in the private sector. Now, it has increased to 30.8 per cent, largely because of government-driven public investment.
There is optimism now that private sector participation will rise in the next five years due to improved balance sheets and profitability. The gross fixed capital formation (GFCF) rate needs to rise from 30.8 per cent now to 35 -36 per cent in the next five years, aiding India to grow at a sustainable rate when the world is going to be extraordinarily difficult. This would be the critical driver that will sustain growth towards Viksit Bharat 2047 including generating productive employment.
The government also need to review the incentive structure for micro, small and medium enterprises (MSMEs). The support needs to be tied to economic activity as a percentage of GDP rather than to any absolute number like turnover of entities, set in the distant past. This could encourage smaller units to grow bigger instead of limiting themselves to a certain size threshold set in a different era to keep getting official incentives. Both the Centre and states have to focus on this as MSMEs are the largest employers in non-farm sectors.
Two domestic demand components namely private final consumption expenditure and gross fixed capital formation together accounted for a fall of 1.5 per cent points in the second quarter of 2024-25 which nearly fully explains the fall in the GDP growth from 6.7 per cent in the first quarter to 5.4 per cent in the second quarter of the current financial year.
One outstanding feature of demand is the slowdown in investment, as reflected in the growth of gross fixed capital formation. This growth is estimated at 5.4 per cent in Q2 of 2024-25, which is a six-quarter low. Apart from the fact that private investment demand has not picked up, there was a contraction in the Centre’s investment expenditure growth by over 12 per cent in April-November of 2024-25.
Besides addressing inflationary concerns, which reduce the purchasing power of the masses, the government would have to usher in reforms in land, labour and farm laws to usher in private investments, which would lead to job creation.
To commence the next phase of the development cycle to get back to 7-8 per cent economic growth, the government should also aggressively pursue Free Trade Agreements (FTAs) to make India part of the global value chain.
The government’s policy-making, which has been dynamic in recent years to respond to various emerging challenges, would have to make it conducive for India Inc. to invest and expand.
