Public capex will decline as govt reduces fiscal deficit, private investment must step up: Goldman Sachs

2023-10-09 14:27:41

Private investment needs to pick up as the level of capex cannot be sustained by the government, said Goldman Sachs in a report released Monday. The global investment bank stated that public capex has peaked and will decline as the government reduces its fiscal deficit by almost 1.5 percentage points to 4.5% 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,” Goldman Sachs analysts stated.

The government has set a fiscal deficit target of 5.9% for FY24. Central government capex has increased at a compounded annual growth rate of 33% over the last three years, with the ratio of capex spending doubling to 3.3% in FY24 from 1.5% between FY18 and FY21.

“The Indian private corporate sector has an opportunity to increase investment growth over this decade, as companies re-align their supply chains and potentially diversify beyond China manufacturing locations,” the report further pointed out.

Experts have been indicating green shoots of private capex recovery to supplement the push in government capex.

Goldman Sachs noted that deleveraged bank balance sheets and well-capitalised bank balance sheets could aid in capex recovery. The bank also noted that faster regulatory clearances were also required to aid the private sector.While the investment bank highlighted that domestic industrial production and global demand have been more important drivers of investment growth in the past than financing conditions, it pointed that domestic demand would be driving investment activity in coming years.“Given the focus on ‘Make in India’ and import substitution, we expect a pick-up in private investment activity in coming years to be driven more by domestic demand, and easing of supply-side bottlenecks,” it said.

Changing gears