“The virtuous cycle of investment requires public investment to crowd-in private investment,” said Finance Minister Nirmala Sitharaman in her 2022-23 Budget speech on Tuesday. In order to pump-prime private investments, she announced a 35 per cent jump in central government capex from ₹5.50 lakh crore in FY22 to ₹7.50 lakh crore in FY23.

She did not stop there. She also announced an interest free 50-year loan of ₹1 lakh crore for the States, to be spent on infrastructure projects. The Centre, thus, will be spending as much as 4.1 per cent of GDP on capital expenditure in 2022-23. Looking back, private capex revival was one of the important themes of this year’s Budget.

The reasons are not far to seek. Typically, gross fixed capital formation (GFCF) — a proxy for private investments, accounts for a third of the GDP. Thus, its contribution for a faster pace of economic growth is significant. Also, India’s rapid growth rate of 8+ per cent in the 2009-10 period was preceded by a high GFCF years (it was as high as 35.81 of GDP in 2007). In 2020-21, it had dropped to 31.2 per cent.

Reviving pvt investments

This is not the government’s first attempt to revive private capital formation. In September 2019, it cut corporate tax sharply. A new domestic manufacturing company will now pay a tax of just 15 per cent against the earlier 25 per cent. It continues to spend heavily on capital expenditure, especially on infrastructure, in a bid to increase the multiplier effect on the economy.

Reserve Bank of India, for its part, has been maintaining an accommodative monetary policy. This has ensured that borrowing costs remained low. Finally, the governmentlaunched the productivity-linked incentive (PLI) scheme with an outlay in excess of ₹2 lakh crore. This is not only to increase Indian manufacturing’s self-reliance but also with the hope that it will catalyse the moribund private investment.

But private capex refused to budge for a variety of reasons. India Inc took to massive capacity additions during the 2005-11 period as money was cheap and the global economy was on steroids. The 2008-09 financial crisis imparted the first blow to consumption. Though domestic demand in India was not impacted in a big way, exports were hit.

Then inflation shot up in India. Hit by rising prices, domestic demand declined and capacity utilisation of various industries fell. Companies which had increased their capacities hoping for sustained rise in demand were trapped. Their production was low and as the interest costs rose, their ability to service the debt suffered causing bad-debts to surge. This created the double-balance sheet crisis (over-leveraged balance sheet of companies and high bad debts of banks). All these were compounded by a slowing Indian economy.

Policy uncertainty also played a significant part. Retrospective taxation, though reversed now, was a big blow to the investor sentiment. Frequent changes to taxation rates and duties were also a factor. Protectionism, like elsewhere in the world, increased in India too. The credibility of the government numbers also came to be questioned — be it Budget assumptions or GDP data. According to HSBC, its policy uncertainty index is running 40 per cent higher today compared to the 2003-07 period.

By focussing on growth over fiscal consolidation, the Finance Minister has set the stage for higher demand and consequent increase in capacity utilisation. She has not given up on fiscal prudence (the government is sticking to its fiscal deficit target of 4.5 per cent of GDP by 2025-26) but the message is clear — immediate priority is to revive growth. Credibility of the Budget numbers have been substantially enhanced.

The extra-Budgetary borrowings have been trimmed from ₹1.48 lakh crore in FY20 to just ₹750 crore in FY22 and in FY23 it will be zero. She has also made fair assumptions for FY23. The nominal growth assumed of 11.1 per cent is conservative. The government has stopped using inflated divestment targets to show better deficit numbers. As against ₹1.75 lakh crore in FY22 (₹78,000 crore likely to be achieved if LIC IPO sails through), only ₹65,000 crore has been budgeted in FY23.

Uneven recovery

What the Budget chose not to address is the uneven nature of the post-Covid recovery. It is now clear that poor and lower middle-class have been disproportionately affected and that is causing a skewed demand — off-take of luxury cars more than that of two wheelers, for instance. The uneven recovery also extends to companies.

As per a CRISIL research paper, large companies have seen higher capacity utilisation than medium and smaller companies. It was expected that the Finance Minister would give some sops for the underprivileged and a helping hand for mid-sized firms to broad base the recovery. That has not happened. The government, it appears, is of the view that the recovery will get evened out as economic growth increases over time. But immediate impact of this uneven recovery on private capex is unclear.

However, the conditions for a private capex recovery are ripe. Capacity utilisation (for large firms) has risen and has already crossed or is near the threshold level that typically triggers expansion. This is on account of booming exports and reviving domestic demand. India Inc had used the pandemic to de-leverage its balance sheet and is best placed to raise fresh resources for adding capacity. Domestic interest rates continue to be low and even cheaper funds are available globally as the world is sloshing in liquidity.

In fact, there are signs of a nascent revival in private capex. According to Project Today data, private investment in April-December’21 rose by 174 per cent to ₹8.7 lakh crore as against ₹4.28 lakh crore in the first nine months of the previous fiscal. Also, the Advanced Estimates for FY22 puts GFCF at 32.9 per cent of GDP as against 31.2 per cent in FY21.

Some argue that it is a bit too early to celebrate as it could be pent-up capex. Nevertheless, it is a growth and the government should ensure that it is not only sustained but accelerated.