Private capex is reviving in sectors that cater to domestic demand. A broader resurgence in manufacturing can be obtained by pushing industry up the value chain. This is being attempted through targeted production-linked incentives (PLIs).
In an interaction with industry last week, Chief Economic Advisor V Anantha Nageswaran pointed out the pace of public sector capital expenditure must eventually slow down, ideally after having provided private capex a jumpstart. Public capex has been powering India’s economy through the better part of the decade that saw a bad loan clean-up followed by pandemic-induced demand destruction and an energy shock. The expectation of an overdue revival in private capex coincides with recessionary trends in the world economy and tightening of global liquidity. The near-term investment outlook is encouraging in select sectors. Broad-based capacity utilisation is climbing grudgingly despite healthy corporate balance sheets and earnings amid a significantly improved tax and policy environment.
For now, GoI may find it difficult to dial back on its capex plans that rely on crowding in private investment through a high GDP multiplier. This course has merit over consumption-led growth via tax giveaways. But the public sector must be mindful of the potential of its borrowing-funded investment to crowd out corporate credit and push up capital costs overall, a point Nageswaran makes. Regaining the fiscal balance while running a large capex programme needs consistent improvement in tax collection. Simplification and improved administration will help maintain momentum in tax revenue once favourable base effects fade away.
Private capex is reviving in sectors that cater to domestic demand. A broader resurgence in manufacturing can be obtained by pushing industry up the value chain. This is being attempted through targeted production-linked incentives (PLIs). But these are being cornered by overseas investment and need to be tweaked to give local industry a leg up. Tariff protection to domestic manufacturing could yield mixed results if it is dependent more on factor arbitrage than on innovation. The policy environment is being shaped for industry to scale up for markets beyond India. Demand, both local and global, is not yet supportive.