Govt capex leads investment growth, 'skewed consumption' a concern

Sunil Kumar Sinha, principal economist, India Ratings says that a robust growth in GFCF reflects the sustained focus of the government on capital expenditure

Pushed by robust government capital expenditure, infrastructure investments are expected to show a strong showing in the current financial year, according to the first Advance Estimates of gross domestic product (GDP) for FY24 released by the National Statistical Office (NSO) on Friday.

Analysts, however, warned that a broad based recovery is still some time away and a slowdown in investments in the second half of the current fiscal year is expected.

The data by the NSO shows that the Gross Fixed Capital Formation (GFCF), a proxy for infrastructure investment, is expected to rise to 29.8 per cent of GDP in FY24 from 29.2 per cent in FY23 in nominal terms. In real terms, investment demand is likely to grow at 10.3 per cent in FY24 compared to 11.4 per cent in FY23.

Sunil Kumar Sinha, principal economist at India Ratings, said robust growth in GFCF reflected the sustained focus of the government on capital expenditure. “Although green shoots are becoming visible in private corporate capex, yet the heavy lifting is being done by the government capex, which indeed is providing the necessary support to the ongoing recovery,” he said.

Aditi Nayar, chief economist at ICRA, said the government’s capex declined by 8.8 per cent Y-o-Y during October-November 2023 after rising by 43.1 per cent in H1FY24, thus leading to a feared temporary slowdown in capex ahead of the general elections. 

Besides, Private Final Consumption Expenditure (PFCE), which is a proxy for household consumption, is expected to rise to 60.9 per cent of GDP in FY24 from 60.6 per cent in FY23 in nominal terms. However, private spending growth is projected to slow down to 4.4 per cent in FY24 from 7.5 per cent in FY23 in real terms due to its skewness in favour of goods and services which is consumed largely by the households belonging to the upper income bracket. 

“The PFCE growth in FY24 would be the slowest since FY03 (barring the Covid year of FY21),” adds Sinha.

Rajani Sinha, chief economist at CARE Ratings, said the weak consumption growth was concerning as it would be the slowest growth rate in the past two decades. “Investment has grown led by strong capex by Centre and the state governments. However, for the investment growth to be sustained it is very important for the consumption growth to be bolstered,” she said. 

The Government Final Consumption Expenditure (GFCE), which reflects the revenue expenditure, is expected to remain stable at 10.3 per cent of GDP in nominal terms. However, in real terms, GFCE is expected to pick up pace in FY24 to grow at 4.1 per cent from 0.1 per cent in FY23 in real terms.