By Rajnish Gupta
What has changed since the last budget was presented? Firstly, India’s FY 25 growth estimates have been revised downward by many agencies, including the RBI, from ~7% to ~6.5%. This came on the back of slower growth in Q2 of FY 25. While India’s growth drivers such as macroeconomic stability and service exports continue to be strong, measures that can stimulate short- and long-term growth will be closely analysed. Secondly, the new US administration’s actions have brought the focus on the importance of deregulation, manufacturing, and local job creation, access to cheap energy, and managing Government-to-debt ratios. These issues are also important for the Indian economy.
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Growth in Government capex to GDP is really a post-Covid phenomenon. Combined capex of the Union and State Governments increased from 3.6% of GDP in 2019-20 to 5.6% in 2023-24. One of the intents was to preserve growth while private capex was expected to be subdued. Central Government capex till date in FY 25 has underperformed FY 24 by 17%, impacting economic growth. There are three areas of interest with regard to Government capex. First is the likely spend in FY 25. Secondly, the allocation for the coming year, i.e., FY 26—what will be the increase? Lastly, will the capex spending be made more broad-based beyond railways, roads, and defence? Urban infrastructure is one area that needs and can possibly absorb significant capital spending. This is, however, a state subject. Any scheme or programme that the Government formulates, working with the states for funding and developing urban infrastructure, will not only improve the quality of day-to-day life but can be a driver of long-term growth.
While the Government formulates its capex budget and priorities, the general expectation is that the Government will exceed its fiscal deficit target. Achievements till date and continuing fiscal consolidation are welcome. Given the need for fiscal consolidation, there is limited room for expanding public investment at the scale seen since the onset of Covid, as discussed above. Therefore, private investments need to go up. Nurturing PPPs for private investments in infrastructure, divestments, and policy nudges that incentivise private investments, especially in manufacturing, are important for long-term growth.
PPPs and divestments are particularly important.
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