Investment more than consumption leading India’s economic growth, economists say

A surge in investments that offset sluggish consumption to boost India’s growth in 2022-23 is expected to power the economy in the current financial year as the government pushes ahead with massive capital expenditure plans, economists said.

This, in turn, could reflect across sectors like construction, which have a multiplier effect on the economy by creating employment, eventually generating consumption demand, they said.

“The investment demand is the only component that has held fort,” Soumya Kanti Ghosh, chief economist at State Bank of India, wrote in a note.

Gross fixed capital formation, which reflects investment, rose 8.9% in the January-March quarter and 11.4% for the full financial year, data released on Wednesday showed.

The central government’s capex push has been “unrelenting,” Sajjid Chinoy, JP Morgan’s chief India economist, said, noting that states that were sluggish in spending earlier in the year also pushed up expenditure by 24% in the January-March quarter.

The central government has budgeted 10 trillion rupees in capex for this fiscal year.

The turn comes after a decade when balance sheet stress in the economy kept investment in check. While government investment has picked up, a “modest crowding-in” of private investment is likely in 2023/24, economists at ICICI Securities said in note.

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Reuters Graphics


The capex push over the last three years has driven growth in the construction sector closer to pre-pandemic levels, JP Morgan’s Chinoy said.

The sector grew 10.4% in the fourth quarter and at 10% over the full financial year.

The construction sector indirectly helps to absorb excess rural labour and create a multiplier effect on the overall economy in the medium term, said QuantEco Research economists Yuvika Singhal and Vivek Kumar.

Economists are more sceptical about the 4.5% growth spurt seen in gross value added (GVA) in the manufacturing sector.

“We believe higher manufacturing GVA likely reflects the benefit to profits from lower input costs,” said Nomura economists Sonal Varma and Aurodeep Nandi.

The surprising strength in growth is also partly being attributed by economists to a statistical quirk.

The government computes real GDP by adjusting nominal GDP growth with an inflation deflator closely tied to wholesale prices instead of retail prices.

At a time when wholesale inflation has turned negative, this could provide a statistical boost to manufacturing and overall GDP growth. “Therefore, the manufacturing and GDP data for the current quarter will need to be carefully interpreted,” said JP Morgan’s Chinoy.

Other indicators, however, reflect strength in demand as well.

The S&P Global India Manufacturing PMI rose to 58.7 in May – the strongest since October 2022.”Demand conditions demonstrated remarkable strength, with factory orders rising at the fastest pace since January 2021,” per a statement disclosing the PMI data.

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Reuters Graphics


In contrast, private consumption grew at a sluggish 2.8% in the fourth quarter. Sequentially, consumption grew just 0.5% in the January-March period after contracting 2% in the previous three months.

“Higher inflation may be a key reason behind the sluggish performance in private consumption,” said Nomura’s Varma and Nandi.

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Reuters Graphics
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