Private capex key to India achieving growth potential: finance ministry

The government has taken several steps in the last few years to boost private investments, including lowering the corporate tax rate, introducing production linked incentive schemes and recalibrating the customs duty regime to incentivise local production. 

“As and when the Indian private sector embarks on the long-awaited capital expenditure cycle, building on the government’s capital expenditure of recent years, India’s potential and estimated economic growth performance in the rest of the decade will inevitably be revised higher,” the ministry said in its report.

The ministry expects that going forward, kharif sowing supported by southwest monsoon coupled with higher minimum support price for Kharif crops is likely to enhance rural demand. 

Urban consumption is expected to benefit from the demand for contact-intensive services, improving performance of corporates and growing optimism of consumers. The robust production of capital goods along with the government’s capex push and large expansion in bank credit will uphold the investment activity, the report said. 

The manufacturing sector is expected to gain from easing of input prices and a rise in consumer demand during the festive season, the ministry pointed out. Quoting a survey by the RBI, the report said that manufacturing firms expect sustained improvement in production volumes and new orders in the second quarter.

Barring further adverse shocks to commodity prices and, thus, India’s terms of trade, economic growth will consolidate and retain its momentum into 2023- 24, the report said.

The sustained decline in the price of crude oil into August since June and the decline in the inflation rate in India below 7% and the impressive growth in India’s tax revenue collection in the current financial year have combined to contribute to a significant easing of concerns over growth and inflation in the current financial year, the ministry said.

“Risks remain, however. The geopolitical environment remains tense and fraught. This could trigger fresh supply concerns in the winter for critical commodities such as crude oil and natural gas. The Chinese economy is struggling and the central bank has unexpectedly lowered its policy rate signalling serious worries about growth,” the report said. That, the report said, could trigger risk aversion in financial markets around the world.

“Inflation rates are still stubbornly high. Without further considerable policy tightening, it is difficult to see the inflation rate in the advanced world drop to around 2% to 3%. Such tightening would almost guarantee a recession for economic growth and corporate profits. Hence, a reality check on the part of stock markets in the developed world could bring back growth chills everywhere,” the report said.

It is not necessarily the right thing to do to project either optimism or pessimism too far ahead in these uncertain times, the report said. 

“For now, India looks better placed on the growth-inflation-external balance triangle for 2022-23 than it did two months ago. Such an improvement in the cyclical prospect is a reflection of the swift economic policy response by the government and the central bank,” the report said. 

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