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Capital expenditure reignites India's economic engine
Summary
Real GDP grew 7.2% in FY23, surpassing the government’s advance estimates as well as Reserve Bank of India’s (RBI) projection.
India’s gross domestic product (GDP) print for the January-March quarter (Q4FY23) and FY23 sprang a positive surprise, despite headwinds. This has prompted many economists to revise their FY24 growth forecast upwards. Real GDP grew 7.2% in FY23, surpassing the government’s advance estimates as well as Reserve Bank of India’s (RBI) projection. However, this is also a moderation from the GDP growth of 9.1% seen in FY22.
In Q4, GDP growth rebounded to 6.1% year-on-year (y-o-y), after dipping to a three-quarter low of 4.5% y-o-y in Q3, led by a broad-based pick-up in consumption spending and investment (gross fixed capital formation) as well as an uptick in net exports led by a sharp decline in imports growth amid easing global commodity prices, particularly oil.
It is worth noting that gross value added (GVA) growth came in even higher at 6.5% y-o-y, led by a sharp rebound in industry and robust performance of agriculture and services sector. Difference between GDP and GVA is on account of net indirect taxes (or indirect taxes minus subsidies).
The pick-up in growth momentum in Q4 has come against a challenging global backdrop. Elevated global inflation, early signs of growth moderation in some advanced economies and continued monetary tightening by major central banks in the early months of 2023 posed significant headwinds. More importantly, financial market volatility surged during the period, triggered by the bank crisis in the US.
Back home, the scenario was not rosy either, with consumption demand fading from recent highs and the transmission of RBI’s monetary tightening starting to impact aggregate demand. Much of this pain is reflected in the muted pace of growth in private consumption spending and exports in Q4.
Slowdown in private consumption spending is concerning. Particularly as it accounts for the largest share of the GDP pie and has been the most resilient driver of India’s growth story, barring the covid dip.
Thankfully, in FY23 and Q4, the weakness in private consumption spending was offset by an increased traction in capital expenditure (capex), thus aiding growth. “In contribution terms, investment continued to outpace private sector consumption. The ratio of investment to GDP rose to 35.3% in Q4, which is highest since mid-2011," said a IDFC First Bank report dated 31 May.
Government’s infrastructure push and increased capital spending may have helped to crowd in private investments. This, along with stronger corporate balance sheets and robust banking sector credit growth, bodes well for private capital spending scenario. But that may not be enough. “The rebalancing of demand from private consumption to investments supported by government capex needs further support," said SBI Research on 1 June.
On fiscal front, government seems committed to this with a huge 37.4% y-o-y increase in capex outlay in FY24 Union budget. What offers additional respite is that monetary conditions are likely to become supportive going ahead. With GDP growth coming in better-than-anticipated, economic momentum relatively resilient and inflation down, RBI may have neared end of monetary tightening. Systemic credit may become easier hereon. This adds to optimism that pickup in domestic private capital spending may hold ground and likely spur economic momentum.
In the face of aforementioned potential headwinds, nascent revival in domestic capex cycle may be a saving grace and could do the heavy lifting for India, especially when private consumption spending is losing steam and exports outlook remain benign amid subdued global trade environment.
