Capex quandary: on the economic data, policy   Politics & News

Since the COVID-19 pandemic, the Centre has been using public capital expenditure on infrastructure to pump prime the economic recovery. The mantra has been that infrastructure building will stoke demand for products such as cement and steel, generate jobs in construction, and together trigger a strong multiplier effect on the economy, eventually creating conducive conditions for private investors to plan greenfield and brownfield projects. In Budget 2024-25, Finance Minister Nirmala Sitharaman said the government will endeavour to maintain strong fiscal support for infrastructure over the next five years, in conjunction with imperatives of other priorities and fiscal consolidation. She announced ₹11.11 lakh crore of capex spends this year, amounting to 3.4% of GDP. That goal is unlikely to be attained partly due to spending curbs in the poll-affected first quarter. While industry has urged the Centre to continue the capex push in 2025-26 as well, it has failed to respond to the government’s constant nudges and persuasions to ramp up their own operations.

Data show that two of this year’s first three quarters have recorded a notable sequential decline in private investment plans, particularly by domestic industry. In Q1, private capex plans dropped to multi-year lows, and though the July-September quarter recorded a recovery in investment intentions, that uptick has dissipated in Q3. Projects Today data suggest domestic investments’ value dropped 1.4% from Q2, while new projects’ value dropped over 22% from a year ago as per the Centre for Monitoring Indian Economy. There are many factors playing on corporate risk-taking capacity — weak Q2 results, global uncertainties, spiking costs and waning demand in more lucrative urban markets. Going by current indications, including the early bird Q3 results, demand has not really improved, nor is there ostensible pressure on factory capacities to warrant expansions. For a sustainable breakout from this slowdown, private capital should take the driving seat because there are limits to enhancing public capex while maintaining fiscal rectitude and providing for myriad welfare schemes. The government must accept that exhortations to industry are unlikely to spur fresh outlays, and incentives focused on themes such as import-substitution are insufficient. Not one new rupee will be deployed if a project is unviable and demand flaky. Policy focus should remain firmly on ensuring the ground is ripe to instigate investments and easing the realisation of such plans into billowing chimneys and new jobs. For that, boosting incomes and consumption is critical as is expediting macro- and micro-level reforms. That an economic policy framework outlining next generation reforms, promised in the Budget, has not been heard of since then, is not very comforting.