For any economy to have overall development and sustainable growth, private sector investment is essential. The government must woo private sector investment for this to happen.
But how does the government do it? It usually woos private sector investment by boosting Capital Expenditure (henceforth capex).
Capital expenditures are investments in long-lived assets, like property, plant and equipment, which are expected to yield future economic benefits.
Public investment in national accounts includes capital spending by the government and public entities. Capital expenditure is the key to economic expansion and long-term growth.
Crowding in private investment has been the government’s constant refrain through the varying phases that included a once-in-a-century pandemic and protracted periods of slowing global growth.
In 2022, Finance Minister Nirmala Sitharaman even compared India Inc. to Hanuman, asking the industry why it was hesitant to invest and if, like Hanuman, it did not believe in its own strength.
The industry, however, has been in a wait-and-watch phase for more than a couple of years now. The private sector must shoulder responsibility for investments as the government has fiscal constraints and may not be able to keep increasing its CapEx.
CapEx expectations in the present budget
The Central government’s aspiration has been to continue to ramp up Capital Expenditure and has been stressing more on State governments to spend on capital assets, but it is still unclear when this will take place.
This is due to a lack of cooperation and the states’ lack of desire to increase their Capex budgets.
In the 2024-25 Union Budget, CapEx was budgeted with an increase of 11.1%. However, Effective Capita Expenditure (CapEx + Grants-in-Aid for creation of Capital Account) budgeted an increase of 15% compared to 2023-24 BE, and 18.2% in 2023-24 RE.
The capex-to-GDP ratio has increased from 1.7% of GDP in 2019-20 to 3.4% in 2024-25.
Still however, it has failed to crowd in private investments despite a healthier bank balance sheet.
Need for crowding in for sustainable development and growth
According to 52% of participants in the 27th round of the RBI’s Systemic Risk Survey (SRS), which was carried out in November 2024 and included both market participants and economists, the capital expenditure cycle will not rebound in the upcoming year.
Merely 44% see a possible resurgence throughout that period, and this is a worrisome factor.
Strong consumption spending is the key to giving businesses the confidence to invest in building fixed capital. Economists recommend that the government put more money into the hands of the people as a measure to boost consumption expenditure and, in turn, motivate private sector investments.
In short, businesses must see reason to invest. The confidence of a business in favour of investment lies purely in the strong possibility of consumption spending by consumers.
Therefore, the government must put more money into the hands of the people. By doing so, it will boost not only consumption expenditure, but also Crowding-in-Effect (i.e. more private investment will occur).
Needless to say, without creating more favourable conditions for investments, there cannot be Crowding-in-Effect.
Without private investment, it is difficult for any economy to have sustainable growth and India is no exception to that norm.
Considering all these, along with the prevalent uncertainty, the government will have no other option but to shoulder the burden until a revival in capex happens.
