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Consumption Jump, Slower Capex
Context:
Growth in infrastructure investment is expected to moderate in the current financial year (FY25) compared to FY24, driven by a slowdown in government capital expenditure and sluggish private investments.
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- This projection is based on the first advance estimates of GDP for FY25, released by the National Statistics Office (NSO).
- However, an uptick in rural spending may contribute to higher overall consumption growth this year.
Decline in Investment Demand
- The NSO data indicates that the share of Gross Fixed Capital Formation (GFCF), a measure of infrastructure investment, is likely to decline to 30.1% of GDP in FY25, down from 30.8% in FY24 in nominal terms.
- Growth in investment demand in real terms is projected to slow to 6.4% in FY25, compared to 9% in the previous financial year.
- Government capital expenditure, which played a key role in reviving investments post-pandemic, has moderated due to general elections and the government’s focus on fiscal consolidation.
- Private investments have also remained muted, with activity limited to specific sectors like chemicals, renewables, and roads.
- This scenario reflects a counter-cyclical approach, where the government’s fiscal policies are adjusting in response to economic conditions—reducing spending during an election period while aiming for long-term stability and growth.
- Aditi Nayar, chief economist at ICRA, expressed optimism that GFCF growth might exceed NSO projections, supported by an expected pickup in government capital expenditure and some recovery in private investments in the second half of FY25, following election-related disruptions earlier in the year.
Rise in Consumption Spending
- The share of Private Final Consumption Expenditure (PFCE), representing household consumption, is projected to increase to 61.8% of GDP in FY25, compared to 60.3% in FY24 in nominal terms.
- Growth in private spending is expected to rise to 7.3% in FY25, up from 4% in FY24 in real terms.
- There are signs of recovery in rural consumption, including increases in rural real wages and two-wheeler sales.
- FMCG companies have also reported improved rural demand, although urban demand remains subdued.
Rural Consumption Outlook
- Rural consumption, which accounts for about 60% of India’s private consumption, is set to benefit from healthy kharif production and promising prospects for the rabi season.
- Higher agricultural growth this year is expected to support rural consumption.
- Declining food inflation will boost discretionary spending, especially among low-income households with a larger share of food in their consumption basket.
Barbell Strategy
- To navigate these economic challenges effectively, employing a Barbell Strategy within an Agile framework could be beneficial.
- This strategy involves balancing investments between very safe assets (such as public infrastructure) and high-risk opportunities (like emerging sectors).
- By maintaining this dual focus, policymakers can ensure that while they safeguard against downturns through stable investments, they also capitalise on potential high-growth areas that may arise as economic conditions evolve.
- The Economic Survey 2020-21 stated that the Indian government adopted this approach. The Barbell approach allowed for better targeting of vulnerable businesses during the pandemic, reducing its economic impact significantly. Over the past two years, this strategy enabled the government to use various High-Frequency Indicators (HFIs) from both public and private sources. This helped them continuously monitor the situation and adjust policies in real time, according to the survey.
While infrastructure investment growth is slowing, driven by reduced government and private spending, a recovery in rural consumption is expected to offset this trend and support overall GDP growth in FY25.
