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NEW DELHI : The overarching theme of finance minister Nirmala Sitharaman’s fifth union budget to be presented on 1 February will be to boost investments while helping businesses deal with the current global economic downturn, a person familiar with discussions in the government said.

Inter-ministerial consultations have kicked off on how to step up investments in specific sectors and make government schemes and programmes more effective. Discussions are also on between the finance ministry and other departments on how to buffer the impact of high energy costs on businesses, stimulate exports hit by the global slowdown and check a decline in foreign direct investments (FDI), said the person.

The ministry has sought proposals on new schemes from other departments that could be announced in the budget —specifically those which have already received the cabinet’s in-principle approval, the person said on condition of anonymity.

The budget’s focus on investments comes at a time when FDI inflow has contracted 14% in the first half of this fiscal to $26.9 billion from the year-ago period. Also, gross fixed capital formation (GFCF), or net capital expenditure of public and private sectors, in the June quarter at 12.7 trillion was slightly below the level seen in the fourth quarter of FY22.

Experts said that given the weakness in global trade, it is important for the government to focus on domestic consumption in order to spur fresh investments.

“There are certain sectors where investment is taking place such as infrastructure and clean energy. In power, one will continue to see good investments in clean energy although that may not be true in the case of thermal power. However, until there is sustained demand growth, sustained investment growth is difficult. In the absence of sustained demand growth, no investor will go for capacity expansion," Devendra Kumar Pant, chief economist, India Ratings and Research (Fitch Group).

“When domestic demand was not very strong, global demand was helping us and we saw strong growth in exports but with the World Trade Organization (WTO) predicting momentum loss in trade volume in the second half of 2022 and in 2023, it is unlikely that export demand and investments to meet that demand will continue," said Pant.

“In this context, what we could do is to revive domestic demand."

The WTO in October predicted that global merchandise trade volumes will grow by 1%, down sharply from its previous estimate of 3.4%.

D.K. Srivastava, chief policy advisor at EY India, pointed to the need to recognize that India’s growth is going to be largely driven by domestic demand.

“The contribution of net exports to real GDP growth may remain negative in FY23," Srivastava said in an analysis shared on Tuesday.

India’s merchandise exports contracted for the first time since March 2021 by 16.6% in October 2022 to $29.78 billion, reflecting global recessionary conditions, as per official estimates.

Policymakers, however, see reason to be optimistic in the strong credit offtake which they say could be an indication of investment revival in certain segments. Central bank data for September showed that non-food credit to industry remained robust. Credit to industry rose 12.6% against 1.7% a year ago, while credit to large industry accelerated 7.9% against a contraction of 2.1% a year ago.

Experts pointed out that industry may remain in a wait-and-watch mode on investments and that the government’s capital expenditure may continue to take the lead until demand conditions improve on a sustained basis.

An email sent to the finance ministry spokesperson on Monday seeking comments for the story remained unanswered.

gireesh.p@livemint.com

ABOUT THE AUTHOR

Gireesh Chandra Prasad

Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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