Experts say govt driving capex even as FinMin praises private sector

Experts believe that investments are down and driven by government, PSUs

Investments were higher in the first quarter (Q1) of the current fiscal year (2021-22, or FY22), compared with the corresponding washout quarter of 2020-21 (FY21). But they were significantly lower in relation to the pre-pandemic 2019-20 (FY20) or the fourth quarter of FY21. 

While the finance ministry believes investments are being driven by the private sector, most independent economists say they are being pushed by the government and public sector enterprises.

Investments rose 55 per cent in Q1FY22 on a low base of 46.6 per cent a year ago, giving an overestimated figure. The correct picture can be gauged from sequential growth, which was down 24 per cent. In comparison with FY20 which showed 17 per cent higher growth in Q1.

The same trend is seen if one looks at investments as a per cent of gross domestic product (GDP). The gross fixed capital formation (GFCF), also called 'investment', was at a three-quarter low at 27 per cent of GDP in Q1FY22.

Chief Economic Advisor (CEA) Krishnamurthy Subramanian said in the preceding quarter, GFCF - as a per cent of GDP - was at a 26-quarter or six and a half year high.  Despite investment activity being halted amid the second Covid wave, investments grew 55 per cent in Q1FY22 year-on-year (YoY), he said. 

"I think this is mainly driven by private sector spending as government capital expenditure (capex) has grown around 15 per cent this quarter, compared to last year," the CEA said.

The jump in private capex spending can also be related to a clutch of corporate announcements reported in the past two-three weeks, such as the $2-billion investment by Aditya Birla Group’s Hindalco. Around $1.75 trillion of capex was announced by the private sector, he said. 

"Private sector now has recorded the highest profits in the past five years. It has deleveraged significantly, which shows it is conducive to invest."

With flat new announcements of around Rs 11 trillion reported in 2020-21 (FY21), compared with Rs 10.8 trillion in FY20, FY22 looks optimistic, with around Rs 5.6 trillion investment announcements made so far in the first five months of the current fiscal year, said State Bank of India Group Chief Economic Advisor Soumya Kanti Ghosh.

Of this, Rs 3.84 trillion - constituting around 70 per cent of this announcement - is from the private sector, 30 per cent from the government, said Ghosh, citing Projects Today report.

India Ratings & Research Chief Economist Devendra Pant said the proportion of capex by the Centre and 12 state governments declined 2 percentage points between Q1FY21 and Q1FY22.

"At a time of low demand and high ideal capacities, capex by the corporate sector is restricted only to a few sectors. The high capex growth is likely to have come from public sector entities and the household sector," said Pant.

ICRA Chief Economist Aditi Nayar said with capacity utilisation remaining low, and the second wave of Covid-19 arresting business confidence, it is primarily the rise in central and state government capex that has boosted GFCF on a YoY basis in Q1FY22.

"Project announcement and completion did improve in Q1FY22, albeit on a very low base," said Nayar.

CRISIL Chief Economist D K Joshi said YoY growth in investments is a base-effect phenomenon. "Despite the push in public investment, overall investments are anaemic. Private investments have failed to lift due to low-capacity utilisation - an indication of weak domestic demand," said Joshi.

He said the promising part is the government's focus on infrastructure investments, which will, over time, support the investment cycle.

CARE Ratings Chief Economist Madan Sabnavis said one needs to compare investments in Q1FY22 to Q1FY20 since FY21 was a washout.

"Therefore, growth is down and not impressive. The extent to which it is happening, credit should go to the government. Private sector is down as debt issuances and credit growth are lower," said Sabnavis.