Economy relying on expected Govt capex

The government’s Monthly Economy Review for November 2024 points out that “private capex levels are affected by global uncertainties, excess capacity, and fear of dumping”. These are structural issues that cannot be solved quickly.

The official reasons for the economic slowdown in the last quarter are varied: One, the Reserve Bank of India’s restrictive monetary policy; two, lower government capital expenditure (capex) due to the ongoing general and state elections; and three, a slowdown in private-sector capex due domestic political factors, global uncertainties, excess capacity, and fear of dumping in India.

The Indian economy has largely been on auto-pilot, delivering only modest growth. While our growth may be higher than many other countries’, it is not sufficient to propel India rapidly into middle-income status.

There is a case to be made for smaller Indian companies continuing to record strong growth. Since the last quarter of FY23, they have benefited immensely from massive government spending. After years of slow economic growth, the Modi government tried to boost it by spending around 11 trillion annually on infrastructure projects such as railways, roads, urban transport, waterworks, energy transformation, and defence production.

There are expectations that government capex will rebound sharply in the last quarter of this year, which is typically stronger than in other quarters. However, the challenge with relying on government capex is that it is heavily dependent on government revenue, and those are weakening.

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