Public spending to make private less ltd – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/public-spending-to-make-private-less-ltd/articleshow/92835932.cms

Synopsis

The ratio of gross fixed capital formation (GFCF)-to-GDP in current prices stood at 28.6% in 2021-22 against 26.6% in 2022-23. The government’s spending and policy must be to boost growth and accelerate the pace of investment, including by foreign direct investment, to lower the fiscal deficit.

The Union government reportedly wants its ministries to spend extra wisely due to concerns over a wider fiscal deficit. High fiscal deficits can cause macroeconomic stress, and they signal GoI laying claim to private sector savings in excess of what the latter has to spare after its own planned investments. This would mean excess demand, that would push up inflation and widen the current account deficit (CAD). However, private investment is still tepid. Companies are reluctant to invest as the global environment is uncertain due to the ongoing geopolitical tensions and their resultant flare-up in energy, commodity prices and supply chain disruptions. Inflation is ruling high, and there are also concerns now over stagflation globally.

Usually, the manufacturing sector looks at capacity addition when capacity utilisation (CU) crosses 80%. The results of RBI‘s early surveys show that CU in the manufacturing sector rose to 74.5% in Q4 FY2021-22 against 72.4% in Q3 FY2021-22. Expectations are that CU will increase in 2022-23. Higher interest costs and pressure on intermediate input prices pose a challenge for many manufacturing companies. Demand also has to be durable for companies to invest more. This makes the case for GoI to raise capital expenditure in infrastructure projects compelling. Higher public investment is needed to crowd in private investment. It will encourage companies that are already deleveraged and have large cash balances to invest.

The ratio of gross fixed capital formation (GFCF)-to-GDP in current prices stood at 28.6% in 2021-22 against 26.6% in 2022-23. The government’s spending and policy must be to boost growth and accelerate the pace of investment, including by foreign direct investment, to lower the fiscal deficit.

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