Opinion Government needs to spend – for India to grow
The vital interplay between public investment and growth will need careful navigation to harness the potential of India's burgeoning economy.
The overall private sector capex has yet to witness a strong pickup. (Source: File) 
As India looks to achieve its target of a $ 5-trillion economy over the next few years, what remains crucial will be maintaining a sustainable growth path without losing our focus on critical issues like fiscal discipline and economic inequality. The Union Budget 2025 carries the potential to impact the economy significantly. It arrives at a crucial time, with the economy facing challenges such as weak GDP growth and low consumer spending. Key expectations include tax reforms to provide relief to individuals and boost consumption, increased capital outlay for infrastructure development, and support for sustainable initiatives in various sectors.
Capital expenditure has become critical in determining India’s growth. The government should continue focusing on productive capex, which has a higher multiplier effect on growth, especially when consumer spending shows weakness. This will support India’s ambition of achieving the $ 5-trillion target.
Recent data highlights an increase in India’s gross fixed capital formation (GFCF), which climbed to 30.8 per cent of GDP during FY24, surpassing the pre-pandemic average of 28.9 percent, observed during the fiscal years 2015 to 2019. However, a chunk of this growth has been supported by the government’s capex push and an upswing in household investments in residential dwellings.
Even though the government has been prioritising infrastructure development, the first half of FY25 (H1FY25) has seen disruptions in momentum due to multiple elections. Data reveals that capital expenditure by central and state governments fell by 15.4 per cent and 10.5 per cent year on year, respectively. Moreover, major central public sector enterprises reported a 10.8 per cent decline in capital expenditure during H1FY25, reaching only 43.6 per cent of their annual target, reflecting cautious spending amid economic challenges.
To bolster capex by states, the Centre has raised the allocation for the 50-year interest-free loans in the Union Budget for FY25 to Rs 1.5 trillion. Of this, Rs 550 billion is an unconditional loan, while the rest is tied to conditions such as industrial growth, land reforms, and state capex growth. It is essential to monitor states’ utilisation of this loan — in the previous fiscal year, they used only Rs 1.1 trillion of the budgeted Rs 1.3 trillion. However, the slowdown in the public capex seems to be temporary, with a likely pickup in the second half.
The overall private sector capex has yet to witness a strong pickup. Headwinds primarily emerge from global policy uncertainties, geopolitical risks, oversupply from China, increased borrowing costs, and muted domestic demand. With the expected monetary policy rate cut and policy support from the Union Budget, we remain hopeful about a likely pick-up in private capex going forward.
Gross FDI inflows have performed well as of FY25 year-to-date; gross FDI inflows stand at $48.6 billion, higher than $42.1 billion in the comparable period of last year. However, higher repatriation of profit has resulted in muted FDI inflows on a net basis. This and the recent outflow of FPIs increase depreciation pressure on the rupee. Given the volatility in the investment landscape arising from global uncertainties and slowing domestic growth, fiscal support remains crucial at this juncture.
The Centre’s budget allocations for capex have more than doubled, from 1.6 per cent of GDP in FY19 to a projected 3.4 per cent in FY25. Meanwhile, state capex is also expected to grow modestly to 2.6 per cent of GDP in FY25, exceeding pre-pandemic levels. Closer scrutiny is warranted regarding the actual deployment of these budgets, as states have often struggled to realise their plans fully.
That said, an upward trend in order books for the capital goods sector, combined with a recovering infrastructure sector, provides a glimmer of hope for increased capital spending across various industries. Order books in the capital goods sector grew 23.6 per cent in FY24, against the CAGR of 4.5 per cent in the preceding four years. Moreover, in H1FY25, there was 10.3 per cent growth compared to the end of FY24, implying healthy momentum.
Infrastructure companies, particularly those involved in road development, saw a decline in their aggregate order book by around 15 per cent in FY24. However, in FY25, the situation has improved, with substantial new orders already secured, showing 20.5 per cent growth in just the first half of the year. Most new orders are coming from the public sector, particularly state governments, indicating a possible pickup in public capex going forward.
In conclusion, while the government has set ambitious capex targets, the slowdown in allocations in recent months has impacted India’s growth momentum. Even though we expect overall public capex to improve following the election period, the current economic environment necessitates vigilant monitoring of capex trajectory. The vital interplay between public investment and growth will need careful navigation to harness the potential of India’s burgeoning economy.
The writer is MD and Group CEO, CareEdge
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