Investments in India led by real estate demand, not public capex: HSBC Global

Investment in India is being led more by private real estate demand, HSBC Global said in a report challenging the dominant narrative that public capital expenditure is driving the country’s investments.

"The government is raising capex meaningfully, but PSUs are cutting back, leaving the overall public investment ratio below pre-pandemic levels. Instead, it is private investment that has risen, led by dwellings & structures," the report said.

"This chimes well with the rise in house sales and housing loan growth. But the other important component of investment – ‘machinery & equipment’ – remains weak, and it would be premature to call the start of a new investment cycle, at least at this point," the HSBC report added.

The report also said that a host of evidence suggests that consumption, though not equitably spread across groups, is stronger than the suggestions made by the latest GDP data.

The report titled, 'India’s investment versus consumption debate Economics India: Setting the record straight', co-written by HSBC's Chief Economist, India and Indonesia, Pranjul Bhandari, and Priya Mehrishi, an associate with the company, also notes that the Reserve Bank of India (RBI) can hold the repo rate steady for now despite low core inflation due to the lack of evidence indicating tight financial conditions.

The interim budget presented on 1 February gave yet another boost to central capital expenditure by raising the allocation on developing infrastructure projects to ₹11.11 trillion for the year starting 1 April, building on increases in recent years to spur economic growth.

The government has stepped up its capex budget in recent years to improve India’s creaking infrastructure, create jobs and accelerate economic growth.

The Centre's capex had grown by 37% in the current year, with growth rates of 24% in FY23 and 40% in FY22.

The latest interim budget marks an 11.1% jump from the previous year’s capex of ₹10 trillion.

Meanwhile, the HSBC report said there are several reasons to believe that consumption growth is not as slow as GDP data suggests.

"Real consumer goods imports have been on the rise and are now 30% higher than pre-pandemic levels. To put this in context, infrastructure and construction goods production is 25% higher than pre-pandemic levels," the report said.

It said that the latest GDP data shows that public and personal services grew at 7.5% annually in real terms, during December, with public services growth remaining weak and government consumption declining by 3.2% annually, implying that private services demand grew quite rapidly.

The non-housing personal loans, part of which fund consumption, are growing rapidly (+19.8% annually), and even faster than the growth in housing loans (+16.7% annually), the report said.

"We believe GDP data is underestimating private consumption. Consumer imports, personal services and non-mortgage growth have all been rising faster than nominal GDP growth," it added.

India’s economy may expand 7.6% in FY24, the second advance estimate released by the statistics ministry in February showed.

According to the government data, gross fixed capital formation or investments in fixed assets is projected to grow at 10.2% in the current financial year, while both household spending and government expenditure adjusted for inflation are expected to grow only at 3% in the current fiscal.

"We believe private consumption will be revised up in subsequent GDP revisions," the HSBC report said. 

"While investment growth could still be higher than consumption growth, the wedge between them would likely turn out to be narrower than is reflected in the GDP data currently, implying that overall economic growth is better balanced between consumption and investment than is widely believed," it added.