Home / Politics / Policy /  Government spending to drive private capex plans

MUMBAI : The government’s focus on building public infrastructure, along with a lower corporate tax rate of 17% for new manufacturing companies until March 2024, is likely to spur private investments, but lack of provisions to nudge private consumption could slow the pace of economic recovery.

“With capital expenditure at more than 4% of GDP and a renewed push in incentivizing various sectors like agriculture, manufacturing, health, digital education, and a big move for transition to clean energy, the budget will drive industrial growth in a big way," said Vivek Bhatia, managing director and CEO, Thyssenkrupp Industries India.

Bhatia added that creating more efficient freight corridors through an additional 25,000km of roads and the launch of a unified logistics interface platform would boost the economy.

Finance minister Nirmala Sitharaman, in her annual budget speech, said the government plans to put in trillions of rupees in building public assets such as roads and housing in the year starting 1 April to put economic growth on a firmer footing. The Economic Survey has projected FY23 growth to slow to 8-8.5% from the estimated 9.2% in the previous year. However, this year’s growth has come off a low base.

Sectors that may benefit from increased government spending include cement, infrastructure companies, metals and capital goods.

In a note last week, Kumar Mangalam Birla, chairman of Aditya Birla Group, said the coming decade would see a capex festival, driven by two engines, the conventional and the new economy and supported by a resolution of the twin balance sheet problem of stressed loans and over-leveraged corporates.

Of the total fixed investment in the economy, private sector investment comprises 35%. The rest comes from central and state governments and public sector enterprises.

“Apart from using public capex to crowd-in private capex, the government has also extended the lower corporate tax rate of 17% for new manufacturing firms until March 2024. Alongside PLI schemes, this is another push for private capex," said Morgan Stanley in a note on Wednesday.

The power sector also benefits from the thrust to green energy and the increase in outlay to 24,000 crore from 19,500 crore. Also, basic customs duty of 40% and 25% on imported solar photovoltaic modules and cells will spur domestic manufacturing, making India a global manufacturing hub.

Though analysts say large private companies are keen on deleveraging, owing to continued demand uncertainty, the production-linked incentive scheme announced in the budget has the potential to generate 2.5-3 trillion of capex spread across 14 sub-schemes between fiscals 2023 and 2025.

“This budget has thrown all its weight behind government-led capex in the hope of setting off a virtuous investment cycle to lift growth. What it misses though, is the bridge—short term, consumption-raising measures to address the unequal recovery so far, tilted against large sections of the population particularly in the informal sector, still under pandemic-led duress," said Crisil Research in a note, adding that the Indian economy is at plucking distance from a faster growth trajectory, two years and three waves into the pandemic.

Analysts at brokerage Emkay Global said while the budget rightly focuses on capex thrust at 2.9% of GDP to help crowd-in the missing private sector, they believe private capex is endogenous and requires some visible consumption demand on the ground to kick-start.

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