Private investment key to sustaining India’s growth, Goldman Sachs

A pick-up in private investment is an imperative for driving India’s growth, according to a latest report by Goldman Sachs.

With the government trying to bring down the fiscal deficit and the likelihood of subsidy bills going up, public capex—which seems to have led to the uptick in real-investment growth recently—may come down, according to the analysts. In such a scenario, private capex will need to pick up to maintain the country’s GDP growth momentum.

The good news is that India Inc is well-positioned to increase their spending, according to the report. It has “an opportunity to increase investment growth over this decade, as companies re-align their supply chains and potentially diversify beyond China manufacturing locations”. Also, the analysts added, “deleveraged corporate sector balance sheets and well-capitalized bank balance sheets, along with faster regulatory clearances could aid a revival in the corporate capex cycle”.

The report noted that investment has been an important driver of India’s GDP growth, and that robust investment growth contributed 3 percentage points (pp) to real GDP growth of 7 percent annually from 2004 to 2012, “which marked a relatively strong epoch for investment in India”.

After real-investment growth slowed to a 15-year low in 2014, it picked up likely due to government spending or public capex.

The central government increased public spending by 33 percent CAGR over the last three years to 3.3 percent of GDP in FY24, from 1.5 percent of GDP on an average between FY18 and FY20.

“This was funded by reducing subsidy spending sharply post-pandemic to 1.4% of GDP in FY24 from nearly 4% of GDP in FY21,” noted the report. But the subsidy bills are set to go up and the analysts estimate that subsidy and transfer payments could increase by 0.3% of GDP in the current fiscal year (from the budget estimates) to absorb food and oil supply shocks.

Added to that, the government is trying to cut fiscal deficit by almost 1.5 percent over the next two years, to 4.5 percent of GDP by FY26.

“With subsidies already near the pre-pandemic lows (Exhibit 16), it is likely that a cut in public capex (as a % of GDP) will have to share the burden of fiscal consolidation, among a reduction in other current expenditure, and likely some improvement in tax receipts,” noted the analysts.

“In other words, the growth in government capex seen in the past few years cannot be sustained going forward, in our view,” they added. Moneycontrol