For an economy already bogged down by a consumption slowdown and a shrinking middle class, the moderation in public and private capital expenditure comes off as a new headache.
There were expectations that a surge in government capex in the previous financial year would help crowd in private investment in the current year.
However, things have not gone as per the script; a recent RBI report confirms the fears that the slack in private investment continues. What has made the situation worse is the slowing capex by government departments as well as central public sector enterprises.
In the first six months of the current financial year, central government capex has shrunk 15 percent while CPSE capex has come down by 11 percent.
Also, early corporate results indicate a low single-digit revenue growth in the second quarter. Rating agency Crisil has even predicted July-September to be the worst in the past 16 quarters.
Faced with the spectre of slowing revenue growth, India Inc would be more focused on protecting their margins than spending on new projects. The consumption pattern in the first half of the year evokes little confidence among private sector players to invest in newer capacity.
All these indicators point to the fact that the Indian economy is caught in a vicious cycle. And a consumption boost may offer an escape route.
The government also needs to maintain high capex in the absence of private sector investment. But for this, the government needs revenue. Therein lies the problem.
Tax collections, after three years of healthy growth, seem to be tapering off. The growth in GST and corporate tax collections has been muted. Corporate tax collection in the first six months of the current financial year has seen just a 2.2 percent growth. Net GST collections till October have grown by 9 percent.
The buoyancy seems to be only in the personal income tax space, where collections have risen by 25 percent. The government must be hoping that the slackness in private investment gives in to some large-scale investments in factories and plants in the rest of the year. The project pipeline has been growing.
However, according to the RBI, completion of these projects still remains a challenge. All this boils down to the fact that the government does not have the fiscal space to do the heavy lifting to buoy both consumption and capex. The private sector has to lend its shoulder, and private investment needs to pick up.