India made a capex bet during covid. It worked: Arvind Virmani

“Capital expenditure has a multiplier effect of 2.45 compared to 1 for revenue expenditure or subsidies," said Niti Aayog member Arvind Virmani, also a former chief economic advisor in the finance ministry. “That has given a big boost to growth... capital expenditure has been going up in the last two years and it has actually worked," Virmani said in an interview.

Virmani’s comments come at a time when many economists, including chief economic advisor Anantha Nageswaran, have said they expect the economy to grow at closer to 8%, even as the Union statistics ministry pegged it at a lower 7.6% in February.

The farm sector, which was impacted by erratic monsoons and net exports, which are now in the negative zone, are expected to improve in FY25, Virmani said, adding that once interest rates in developed economies start softening, Indian exports will gather momentum, especially in items like engineering goods.

Rising capital expenditure has helped boost construction activity as well as wages of workers, Virmani said, adding that rural consumption is now catching up with urban. India’s economic growth strategy of attracting multinational enterprises to manufacture and export from India to break into the global supply chain will also play out strongly in coming years, Virmani said. After raising capex by about 25% in FY23 and by more than 28% in FY24, the Centre has further raised it by 17% to ₹11.1 trillion for FY25 in the interim budget in February.

Virmani said expectations of growth beating estimates this year was really the capital expenditure multiplier of the budget working through the system, which will continue over the years and get better. Building infrastructure is helping not just the GDP growth, but has also added more employment for construction workers, he said.

According to Virmani, India’s economy is expected to grow at over 7% next fiscal (FY25), plus or minus 50 basis points to account for any shocks.

Virmani also said that the El Nino effect on farm sector is temporary and unless there is another shock, agriculture output growth will recover in FY25 and that the sector will return to its normal growth rate, lifting agriculturists’ income.

The second advance estimate of the statistics ministry said last month that farm output will grow only at 0.7% this fiscal, sharply lower than the 1.8% growth projected earlier, but it revised FY23 farm output growth to 4.7%, up from 4% reported provisionally earlier.

Virmani pointed out that high interest rates in the US and Europe tend to slow down imports into those markets, affecting certain categories of Indian exports, such as engineering goods. Once the interest rates start to go down in those markets, India will see some recovery in those types of exports. “Net exports anyway should improve next fiscal," Virmani said. Net export has been in the negative zone, indicating import dependence, for over a decade, as per the current GDP data series.

Virmani also said that household investments into housing is recovering, supporting the overall private investment growth. Besides, most people are expecting interest rates to soften next fiscal, Virmani said. Higher interest rates, talks of a recession in some major economies, excess capacity in China and geopolitical uncertainty were among factors that influenced investment decisions of businesses.

According to Virmani, the government’s strategy of striking free trade agreements (FTAs) will help India attract more large multinational enterprises in domestic manufacturing, which is crucial for getting a better share of global supply chains.

The idea is that FTAs and customs duty adjustments will boost manufacturing, which will prove to be an additional growth driver, Virmani said, citing how the US-Canada-Mexico agreement proved to be beneficial for the three nations. FTAs and tariff reforms will help in making supply chains operate in the most efficient manner, Virmani said.

Since two third of global trade occurs within multinational enterprise supply chains, more investments in local manufacturing by such enterprises will help India scale up its share in global trade. Such investments will also promote skilling of workers and professionals, Virmani said.

As per statistics ministry’s second advance estimate released in February, India’s economy is expected to grow at 7.6% in FY24 amid strong investment growth in plant and machinery, robust manufacturing growth and a slight improvement in trade.