Home / Opinion / Views /  Hope springs anew on a private capex revival

If there’s one cog in the wheel of India’s economy that has been missing for much too long, it is private investment. It has remained largely elusive since its heyday in the latter 2000s ended in a deep slump, marked by a spate of bad loans. This held economic growth back, despite a freeing up of space for banks to lend and other efforts by policymakers to get it going. So weak had its revival been that finance minister Nirmala Sitharaman recently expressed her exasperation to industry leaders. “Since 2019, when I took charge of the finance ministry, I have been hearing ‘Industry doesn’t think [that the environment] is conducive’… I want to hear from India Inc, what’s stopping you?" she asked in September. While the wait has been long, this year has finally begun showing signs of a rebound taking shape. On Thursday, chief economic advisor V. Anantha Nageswaran said that our total private sector capital expenditure in the first half of 2022-23 had crossed 3 trillion and could hit 6 trillion for the full year. This, he added, was a substantial improvement over the past 6-7 years’ record, observing that capacity utilization was nearing levels that had triggered capital investments in the past.

Could this fiscal year’s budget plan of using ramped-up public capex to ‘crowd in’ private plough-ins be working out just as we had hoped? Encouragingly, there are also other indicators that suggest so. Non-food credit surged 18.3% from a year earlier in the fortnight ended 21 October, according to new Reserve Bank of India (RBI) data. Such a brisk pace of lending seems due in large part to rising demand for loans from India Inc. If confirmed, this would mark a significant turnaround, given that bank credit for business has languished for a prolonged period, with our lenders turning their attention to consumer demand for loans. India’s economy is now expected to expand by 6.5% this fiscal year. While this is slower than earlier estimates, it still means we will put the pandemic shock behind us firmly enough for capacity to be stretched in several sectors. To be sure, our recovery has been uneven, with consumption in many markets scarred by covid’s impact. But a fresh round of investment, some of it driven by a green-energy shift, can have a multiplier effect on incomes and animate impulses for a broader return to strength. Export prospects have been dimmed by a global slowdown, sure. But Indian exporters will have to start gearing up now if they expect to ride the next upturn. As for the domestic cost of capital, real lending rates remain benign by past standards, and this would be so even if inflation somehow drops to its target of 4% next year; so long as growth overall is expected to hold up at 6% or more, it should not be all that difficult for financial returns on private projects to exceed that cost. With stock markets ruling high, cheap equity funding can be thrown into the mix too.

The government’s confidence in a private capex resurgence will be reflected in its budget for 2023-24. If it does not need to do most of the heavy lifting any longer, it could slash its fiscal deficit sharply, let private activity sustain economic growth, and help RBI restore price stability. The complexity is that this will be the last full budget before the general elections of 2024, so the Centre would be inclined to weigh the political risks of growth hiccups, in case private capex proves insufficient, versus persistent inflation in the wake of continued high fiscal spending. It’s not an easy call.

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