Govt capital expenditure drags down growth in investment, shows NSO data

An investment share above 30 per cent is considered important for driving economic growth

A slowdown in government capital expenditure at both central and state levels limited growth in capital investments to 5.4 per cent in the second quarter of FY25, down from 7.5 per cent in the previous quarter, according to data released by the National Statistical Office (NSO) on Friday.

 

Gross fixed capital formation (GFCF), a key gauge of infrastructure investment, accounted for 30.8 per cent of GDP in the July-September quarter, compared to 31.3 per cent in the April-June period. 

 

An investment share above 30 per cent is widely considered critical for driving economic growth.

 

Data from the Controller General of Accounts (CGA) showed the central government’s capex utilisation stood at 37.3 per cent (Rs 4.14 trillion) by the end of Q2FY25, a sharp drop from 49 per cent (Rs 4.9 trillion) in the same period last financial year.

 

Rajani Sinha, chief economist, CARE Ratings, said that there has been a sharp moderation in investments as the government’s capex that had been supporting growth thus far witnessed moderation, with the central and consolidated state capex falling by 15 per cent and 11 per cent, respectively, in H1FY25.  

 

D K Joshi, Chief Economist at CRISIL, echoed these concerns. Investments and manufacturing, the growth engines of Q2FY24, have turned into drags this year, he said, adding that weaker government capex was a key factor. “Investment growth needs the private corporate sector to take the baton from the government, as the latter pursues trimming its fiscal deficit.”

 

The slowdown wasn’t confined to investments. Private final consumption expenditure (PFCE), a proxy for household spending, grew 6 per cent in Q2FY25, down from a seven-quarter high of 7.4 per cent in Q1FY25. 

 

Despite this, PFCE’s share in GDP rose to 62 per cent, up from 60.4 per cent in the previous quarter.

 

“Some companies have talked about urban demand slowing down. Also, the impact of the Reserve Bank of India’s past rate hikes is curbing credit growth this financial year. High food inflation, too, has been an overhang on discretionary spending,” said Joshi.

 

However, rural indicators showed some signs of recovery. Rising rural real wages and higher two-wheeler sales suggest a correction in the consumption skew, said Paras Jasrai, senior economic analyst at India Ratings. 

 

“The quarterly results of FMCG companies also point to a sustained recovery in rural demand, which is favourable for both consumption and GDP growth,” he added. 

 

Meanwhile, government final consumption expenditure (GFCE) rebounded to 4.4 per cent in Q2FY25 from a contraction of 0.24 per cent in Q1. However, GFCE’s share of GDP ticked down to 10.1 per cent from 10.2 per cent in the previous quarter.