Capex announcement likely to be between Rs 11-12 trillion: Economist

Budget Run-up: Speculation is rife about the likely nature and highlights of the upcoming Interim Budget on February 1. Economy watchers are curious about the allocation for Capex, for subsidies, and how the upcoming budget will pave the way for sustaining India’s growth story. Republic Business spoke with Rajani Sinha, Chief Economist, CareEdge Ratings. Here are her key insights.

Edited Excerpts: 

Concern for Capex

We are not expecting a very drastic increase, because as you see, Capex has increased quite substantially in the last few years. If you look at the Capex to GDP ratio, it has gone above three per cent. And this number in pre-COVID time was over one per cent at around 2.1 lakh crore. In that sense, a meaningful jump has already taken place. I don't see a very significant jump from here. I do however expect the government to maintain the momentum and keep the ratio of Capex to GDP at more than 3 per cent. This time, we expect the capex to increase from the 10 trillion that they had announced last year to more of around say 11-12 trillion.

Is Capex momentum sustainable or not?

I would say the expectation is that the multiplier effect should work while the government has been doing the heavy lifting now.  It should eventually lead to private Capex picking up, though there has been a delay in that which is resulting in all this questioning as to when exactly the private Capex is going to pick up. If we look at some of the indicators, there, we are seeing signs of probable improvement in private Capex. If I look at the order book of the capital goods companies or the infrastructure companies we have seen a significant jump this year. 

If I look at the Centre for Monitoring Indian Economy (CMIE), new investment projects, and owned data which kind of indicates an intent to invest by the private sector that had jumped up in the quarter before but in the last quarter, we saw that number going down and that could be because of election-related uncertainties, but broadly we are seeing indications of private Capex building up because capacity utilisation level has also reached long term average. 

I think the backdrop is set in terms of global uncertainties as well, even though there will continue to be global uncertainties going forward and the private sector has also kind of learned to live with all these global uncertainties, we don't see much pressure on commodity prices going forward. I would say these aspects are kind of preparing the ground for private Capex to pick up.

Consumption Vs Inflation

One concern is what happens to consumption, because, unless there is a very meaningful recovery in consumption, it doesn't make sense for private Capex to pick up on that.  If I look at the GDP data that came last in the first advance estimate, the consumption GDP growth was a disappointment at 4.4 per cent which reflects that still there is not a broad-based recovery in consumption happening, but there are issues on the consumption front and one of the big issues is inflation remaining high specifically food inflation. When it comes to Capex, even if the heavy lifting is done by the government, if that continues at this momentum we will see some improvement in private capex as well. Even the corporate balance sheet is in a good shape. bank balance sheets are in good shape and other parameters are supportive of private capex to pick up.

Fiscal Deficit and other parameters

The revenue from disinvestment has been low, but at the same time, if I look at the other component of dividend transfer from RBI, and from PSU, the expectation is that it will be good and that will kind of take care of the lower disinvestment number. So, net in terms of government finances, I think they're well placed. One more setback has been that overall nominal GDP growth as per the first advanced estimate is coming out at 8.9 per cent, which is low and that could put some pressure on the fiscal deficit ratio. But we do not see a very significant pressure because of that. Most probably government will be able to meet 5.9 per cent, if not 5.9 per cent, then around six per cent fiscal deficit to GDP ratio.

On Divestment target

They are not going to increase the target significantly, maybe something like Rs 60,000 crore. I am not expecting a very significant jump because they have not been able to achieve this year's target as well. I don't see them increasing that target significantly.

Fiscal Consolidation

I expect the focus on Capex to continue. And that's something which is a very big positive, which we have seen in the last few years. The other big positive is that I think the government's focus on fiscal consolidation will continue. If the budget is for 5.9 per cent, this year, we are expecting around 5.2 to 5.3 per cent for FY 25. So that the government can move to its target of 4.5 per cent for FY 26.  I think the government will make a concerted effort to move towards this target of 4.5 per cent. So those are the aspects that the government will be careful about.