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Informist, Tuesday, Jan. 28, 2025

 

By Krity Ambey and Pratiksha 

 

NEW DELHI - When faced with the choice between devoting fiscal space to capital expenditure and boosting consumption, the Narendra Modi government has always chosen the former. But Bank of Baroda Chief Economist Madan Sabnavis believes that capital expenditure can crowd in private investment across sectors only when the government ensures stable and substantial consumption demand in the economy.

 

"We need consumption to increase, only then will we see some kind of traction taking place when it comes to private sector investment in a broad-based manner," Sabnavis said in an interview with Informist. "Otherwise, it's going to be restricted to things like steel, cement, capital goods." A near-term step in this direction could be slashing income tax rates in the upcoming Budget, he recommended.  

 

With the aim to propel private capital expenditure into the economy, the government has more than tripled its public spending in the last five years. However, private capital expenditure is visible only in select sectors, specifically those pertaining to the infrastructure segment.   

 

Sabnavis suggested that the government should look to raise the INR-1.5-million tax slab, which attracts a tax of 30% under the new regime. "And then accordingly, you adjust the other slabs too. Because if you're thinking of an income tax cut leading to higher consumption, it will have to be based on something large."

 

Sabnavis cautioned that tokenist measures like revision of the standard deduction limit may not help in boosting demand. "If it is done as tokenism at a lower level, that will not really add to overall consumption." 

 

Concerns over India's consumption demand have been on the fore for over a year now, after it hit a three-year low of 4.0% in 2023-24 (Apr-Mar). The government tried to address the sluggish demand situation by raising the standard deduction limit to INR 75,000 from INR 50,000 in the full Budget for FY25, presented in July. It also raised the upper limit of slabs up to INR 1.2 million, but did not cut tax on higher slabs.

 

Following an underwhelming corporate sector performance in Jul-Sept, India's private final consumption cooled to 6% from 7.4% in Apr-Jun. The demand conditions continued to be tepid in the third quarter as well. India's largest fast moving consumer goods company, Hindustan Uniliver Ltd. reported a flat net profit, excluding the proceeds from divestment, in the December quarter.

 

Income tax concessions can help improve the purchasing power of the people, Sabnavis said. This would in turn signal the corporates to expand capacity, he added. "They would not invest unless they see an opportunity and capacity." 

 

While the government's capital expenditure has been slow this year, it is likely to continue its push on it, with next year's spending being as high as INR 11.5 trillion, Sabnavis said. Till November, the government met only 46.2% of its INR-11.11-trillion capital expenditure target for FY25. 

 

GROWTH GRIEVANCE

Despite widespread concerns about the fall in India's growth, Sabnavis remains unconvinced of an economic slowdown and expects an upward revision in GDP prints in the statistics ministry's next estimate for FY25. "There will be lots of revisions coming in because this is the first advanced estimate, which comes just after nine months have passed, and you have data for around seven to eight months," the economist had said last week.

 

Besides concerns over consumption, lower public spending has also contributed to the slowdown in growth, with Jul-Sept GDP expansion hitting a seven-quarter low of 5.4%. As such, the National Statistical Office of the statistics ministry has projected a GDP growth of 6.4% for FY25, the lowest in four years. 

 

After the NSO's estimate, the expectations of a rate cut at the Monetary Policy Committee's February meeting, scheduled a week after the Budget, have soared. Adding to this expectation, the central bank, on Monday, announced multiple measures including bond purchases to ease liquidity conditions and bring down short-term cost of funds.

 

Sabnavis also said that a repo rate cut in February would be viable only after the RBI addresses the liquidity concerns. "Otherwise if you lower the rates, it's quite possible that there could be an increase in demand for credit and the system doesn't have it." 

Now, with the RBI's liquidity-boosting measures in place, a repo rate cut in February looks feasible, he said in a report Tuesday. 

 

Sabnavis is also of the view that since the rupee has settled down in a range now, it could be a secondary worry for the central bank and not primary. However, some sections of the market believe that the RBI might be wary of loosening its monetary policy because of the potential threat to the domestic currency. Since the US election results in early November, the rupee has depreciated 2.8% against a strengthening dollar and strong foreign outflows.

 

He expects the domestic currency to move in a range of 86.50-87.00 a dollar at least till the upcoming Monetary Policy Committee meeting on Feb 7. "I think even in the worst case scenario, in case there is a parity reach with the Euro (of the dollar), we can see the rupee going to around 87.0-87.5 (a dollar)," he said.  End 

 

US$1 = INR 86.53

 

Edited by Vandana Hingorani 

 

 

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