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Home BUSINESS

India May Cut Government Investment Spending

by Ayushi
October 9, 2023
in BUSINESS
To curb its budget deficit, India's government is likely to reduce its investment spending in the coming years, said Goldman Sachs Group Inc., giving the private sector scope to pick up the slack.
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Goldman Sachs Group Inc. anticipates that India’s government will scale back its investment spending in the coming years as it aims to reduce the budget deficit. This shift in government expenditure could open the door for the private sector to play a more significant role in driving economic growth.

 

Prime Minister Narendra Modi’s government plans to decrease the fiscal shortfall by approximately 1.5 percentage points over the next two years. According to Goldman Sachs economists Santanu Sengupta, Arjun Varma, and Andrew Tilton, the rapid growth in capital expenditure seen in recent years cannot be sustained under these fiscal constraints.

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Investment has historically been a key driver of India’s economic growth, contributing three percentage points to the annual real GDP growth rate of 7% from 2004 to 2012, as estimated by the economists at Goldman Sachs.

 

While companies and households have been significant contributors to investment in the economy, their pace has slowed over the past decade due to factors such as sluggish growth in the property market, tighter credit conditions, and declining savings rates. During this period, public investment in capital projects helped offset some of the investment slowdown.

 

The current environment presents an opportunity for the private sector to increase its investment, particularly as businesses seek to diversify supply chains and expand manufacturing beyond China, aligning with Prime Minister Modi’s ‘Make in India’ initiative.

 

Indian companies have been reducing debt, and banks are well-capitalized, providing room for fresh lending to support business expansion. The country’s regulatory environment is also conducive to swift project clearances, potentially facilitating a revival in corporate capital expenditure.

 

The Indian government has allocated a record 10 trillion rupees (approximately $120 billion) for investment in the fiscal year through March 2024. Additionally, it is committed to reducing the budget deficit from 5.9% of GDP in the current year to 4.5% in 2025-26.

 

The private sector’s role in the Indian economy has strengthened following the pandemic, with a surge in credit card spending and banks doubling their retail loan portfolios since 2019.

 

Goldman Sachs expects that the pickup in private sector investment activity in the coming years will be driven by domestic demand and the easing of supply-side bottlenecks, further supporting economic growth and development in India.

Tags: Economic GrowthFiscal DeficitGoldman Sachsgovernment investmentINDIAMake In IndiaNarendra ModiPrivate Sector
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