It is likely that a cut in public capital expenditure (as a % of GDP) will mean the government will need support from the private sector to step up capital investments, among a reduction in other current expenditures. “We are confident about the government adhering to the fiscal consolidation path,” said Santanu Sengupta, chief India economist at Goldman Sachs. “If we analyse their post-pandemic behaviour approach, after the expansion of the deficit, they have been adhering to the path of consolidation. The buffer, partially, is coming from the extra dividend transfers and if you look at last month’s corporate tax and income tax numbers, you would’ve seen that tax revenues have also caught up.”
The government is targeting a fiscal deficit of 5.9% of GDP in FY24 and given the medium-term fiscal consolidation path, it intends to reduce the fiscal deficit by almost 1.5% of GDP over the next two years, to achieve a target of 4.5% of GDP by FY26.
In the past few years, and especially after the pandemic, public capex has most likely underpinned a recovery in investments. The rate of growth in government capex seen in the past few years cannot be sustained going forward. “To offset this, the Indian private corporate sector will have to step in,” Sengupta said.
The sector has an opportunity to increase investment growth over this decade as companies re-align their supply chains and potentially diversify beyond China. Besides, deleveraged corporate sector balance sheets and well-capitalised bank balance sheets, along with faster regulatory clearances, could aid a revival in the corporate capex cycle, he said.
From the long-term perspective, private corporates were the main driver behind the robust growth in investment during the mid-2000s, increasing from 6.4% of GDP in 2004 to 14.2% of GDP in 2008.