There was no cogent evidence of elevated public capex stimulating private investments and engendering a beneficial investment cycle even in the national income data released by the government on Monday. So, does the government’s often-contested strategy of using elevated public capital spending to crowd in private investments, and kick-start a virtuous cycle, need a rethink?
Well, there are two diverging views on this among leading economists FE spoke to: Many feel investment demand at the aggregate level is still weak, while a more optimistic view held by others is overall investment rate being at 35.6% in FY22 (second advance estimate) is significantly above the level seen in the pandemic-hit FY21 (31.9%) and even in FY20 (33.6%), the year before the pandemic. The rise in bank credit to the commercial sector is also cited by the latter lot as proof of a nascent investment revival that might have involved even the private sector.
In a recent e-mail interview to FinancialExpress.com, chief economic adviser V Anantha Nageswaran said: “When consumption demand is weighed down by near-term anxieties and uncertainties — related to health and otherwise — the private sector would wait to see a clearer demand outlook before investing. Hence, the government stepping in with capital expenditure is an appropriate response for the situation that the Indian economy finds itself in.”
“Unless consumption demand improves, investment revival is difficult,” says India Rating chief economist Devendra Pant, highlighting that the estimated 14.6% growth of gross fixed capital formation (GFCF) in FY22 is attributable more to a collapse of investment demand in FY21 (10.4% contraction), than a pick-up in investment. Investment in FY22 was just 2.6% higher than FY20, so what is at play is mainly a base effect, he observes.
NR Bhanumurthy, vice-chancellor at Dr BR Ambedkar School of Economics University, Bengaluru, however, notes that a consumption-led revival will drive the inflation component of nominal GDP with attendant costs to the economy, while investment-led rebound will assimilate straight into real GDP with higher multiplier effect for the near and longer terms. “We expect further pick-up in public investments reducing Covid-19 concerns to revive the investments cycle,” Bhanumurthy says. He also takes heart from overall consumption (both private and government) having crossed pre-pandemic level (67.5% as per FY22 advance estimate against 67.1% in 2019-20).
“Private consumption levels will pick up, if more employment opportunities are created and for this, the government’s investment-led growth strategy is expected to work, although with a lag.” In a 2013 paper on fiscal multipliers co-authored with Sukanya Bose, Bhanumurthy stated that of central government spending, capital expenditure multiplier is much higher (2.45) compared with that of transfer payments (0.98) and other revenue expenditure (0.99). The paper based on 1991-2012 data also found that capital expenditure by the Centre in the study period had higher multiplier than the same by the state governments (2).
DK Srivastava, chief policy advisor at EY India, notes: “In fact, overall investment has remained weak since Q2 of 2019-20, which is also reflected in extremely low capacity utilisation rates. Unless demand picks up, capacity utilisation will not increase and unless capacity utilisation rate comes in the range of 70-75%, new investment may not pick up. The answer lies in stimulating domestic demand as export demand will continue to face uncertainty in the near future.”
So the jury is out on whether the government should opt for a consumption booster via tax cuts and increased transfers to the rest of the economy or stick to the investment-led path it has been advocating for a sustainable growth rebound, particularly since the deep corporate tax cut in 2019-20. “General government’s contribution to investment in the economy over FY12-FY21 is around 12% and it is unlikely to revive investment by its own,” notes Pant.
But even if investments are to be encouraged first, sustained tempo in public capex is necessary. Data released by the Controller General of Accounts on Monday on Central government finances for April-January indicated that the government might be regulating spending, given its fiscal constraints. “Government consumption spending has shown a very weak growth in Q3. This is because revenue expenditures of central and state governments have been curtailed in order to push up growth of capital expenditure. This strategy is not having much impact because the relative share of government capital expenditure in overall expenditure is quite low. There is scope for further accelerating government capital spending as well as consumption spending. The latter has a lower multiplier but its impact on income and employment growth takes much less time to fructify as compared to the capital expenditure multipliers,” says Srivastava.
According to Pant, the root cause of problem is household sector which is still struggling to come back to normalcy after Covid-19. With limited fiscal space and elevated debt level, it appears that the government would not go for direct support in the form of income transfers, he says.
ICRA’s chief economist Aditi Nayar says: “We expect capacity utilisation to reach about 72% by this quarter and rise to 75% by the end of this calendar year, which is the threshold required for a broad-based pickup in capacity expansion by the private sector.”
She would expect the Budget proposals for pushing capex to kick off soon to be able to drive public investments until private investments pick up.
Srivastava says: “Without income and employment growth, the recovery in priuate consumption is bound to be weak. More direct support is needed in the form of an urban counterpart of the MG-NREGA.” Unless MSMEs, informal sectors and contact-intensive sectors which have suffered the largest income erosion due to Covid-19 recover, private consumption expenditure may not show robust growth, he cautions.
