A standout feature of Budgets of recent years has been the salutary focus on capital expenditure. The recently released Finance Ministry’s limited review of the economy reaffirms this commitment, and rightly so. However, in order to lift the investment rate from about 30 per cent of the GDP by about five percentage points in a few years (a prerequisite to hit a growth rate of about 7 per cent, given an incremental capital output ratio of five), all actors will have to pitch in — corporates, households and government. So far, the private non-financial sector has not matched the government’s capex push, even as there are signs of an uptick. The role of industry is central, as government spending (Centre and States) accounts for just below 17 per cent of total investment, with the households and corporates roughly making up the remaining 83 per cent on an equal basis.

The review rightly notes that the Centre has “rebalanced its fiscal expenditure” by raising its capex from 12 per cent of total expenditure in FY18 to 22 per cent in FY24 (₹10-lakh crore). If the share of the Centre and States, broadly speaking, in total investment is up from 9-11 per cent in the past decade to nearly 17 per cent now, as observed by analysts, it tells us that there has been a trend shift. But this order of capex increase could hit a fiscal wall. The private sector cannot but pick up the tab, while the government focuses on efficiency of its investment. The review of the economy notes with respect to an Axis Bank study, that investment by private non-financial companies has improved, having jumped 22 per cent between FY22 and FY23 from ₹4.8-lakh crore to ₹5.9-lakh crore. This exceeds the pre-Covid (FY19) level of ₹4.6-lakh crore. But the jump, as a study by Motilal Oswal Financial Services observes, has been driven by listed companies which account for about 30 per cent of the corporate GVA.

Listed entities’ share in total corporate investments has risen from 26 per cent in the pre-Covid period (FY16-FY21) to 33.5 per cent in FY23. In other words, the listed space has not been badly affected by Covid, whereas the unlisted space has. A clutch of firms is investing in sectors such as oil and gas, telecom, healthcare, metals and technology. Investment in auto, chemicals and cement could pick up. Historically, oil and gas, power, metals, telecom and automobiles have driven investment. As for the other sectors, notwithstanding increases in capacity utilisation, the flat toplines pose a constraint in terms of future outlook.

It appears that there is a demand constraint to investment. To begin with, the government can provide a boost to affordable housing. Above all, it is a historical truth that Indian industry rarely displays risk appetite or ‘animal spirits’, and instead asks for more — ever since the days of the Bombay Club. This is a mindset problem.