Gross fixed capital formation: Advance estimates hopeful, say analysts

Most of capex brunt being borne by Centre, say analysts

The Centre predicts that gross fixed capital formation (GFCF) — a proxy for private and public investment in infrastructure — will exceed the pre-pandemic period of 2019-20 in absolute terms as well as share of gross domestic product, in real and nominal terms.
 
However, analysts say, the forecast on GFCF, part of the 2021-22 GDP advance estimates released by National Statistical Office on Friday, might be optimistic. This is because most of the brunt of capex and pushing big ticket infrastructure projects are being done by the Centre.
 
Private sector capex is still weak due to continued uncertainty over the pandemic, and states are likely to spend more on healthcare and welfare schemes than on new or brownfield infrastructure, economists say, adding that states’ capex need to pick up.
 
“The role of the Centre in capex spending is fairly outsized, especially considering that the economy had slowed before the pandemic. Given the fiscal constraints of state governments, state capex plans are underperforming compared to what the central government is doing,” said Rahul Bajoria, India Chief Economist at Barclays.

 
“At the beginning of the year it looked like the economic dynamism will come back. The second wave somewhat took the wind out of the sails of the private sector, so I think while overall economic performance has been good, private sector capex might take some more time to come back,” Bajoria said.
 
According to the latest NSO data, GFCF for 2021-22 is estimated to come in at Rs 48.5 trillion at constant prices, or 32.9 per cent in terms of share in GDP. This is expectedly higher than Rs 42.2 trillion (31.2 per cent) in 2020-21, but also more than pre-pandemic 2019-20 — Rs 47.3 trillion (32.5 per cent).
 
In nominal terms, GFCF is expected to come in at Rs 68.8 trillion in the current fiscal year, or 29.6 per cent as share in GDP, compared with Rs 53.5 trillion (27.1 per cent) in 2020-21 and Rs 58.5 trillion (28.8 per cent) in 2019-20.
 
“We expect investment to gather further momentum with a pick-up in states’ capital investment that is still being a laggard... The good thing is, however, there has been a pick-up in credit growth recently that might translate into future investment growth,” said Saumya Kanti Ghosh, Chief Economic Advisor, State Bank of India.
 
The finance ministry and the Reserve Bank of India (RBI) are confident that the Centre’s thrust on capex will crowd in private investment. However, a recent report by the central bank says the pandemic had adversely impacted appetite for new projects.
 
A recent report by Care Ratings stated the 10 biggest states in terms of size of capex have budgeted an aggregate Rs 4.45 trillion for the year — 77 per cent of all states’ capex plans. These states are UP, Maharashtra, Tamil Nadu, Karnataka, Madhya Pradesh, Bihar, Gujarat, Andhra Pradesh, Telangana and Rajasthan.
 
However, as of the end of the second quarter (July-September), these states had spent only 28.3 per cent of the budgeted amount.
 
Bank of Baroda Chief Economist Madan Sabnavis, in an article for Business Standard on Friday, had said the GFCF numbers could be up for a major revision when the final estimates are released.
 
Sabnavis, who incidentally authored the above-mentioned report while at Care Ratings, said in his column that meeting the GFCF target this year could be challenging given that private sector investment is down and states have been cautious in their capex given the uncertainty on their fiscal balances.
 
The Centre, which itself has a budgeted capex target of Rs 5.45 trillion, has been nudging the states to spend more on capex by providing interest-free loans to spend on infrastructure. Furthermore, on meeting the capex target set by the Centre for the April-June quarter, 11 states have been permitted to undertake additional open market borrowings equivalent to 0.25 per cent of GSDP.