New, emerging sectors primed for heavy lifting

A raft of policy initiatives mounted in recent years appear to be ever so gradually stoking private sector capital expenditure (capex).

Investments, at 30.8% of GDP — and represented by gross fixed capital formation, or GFCF — over the past two fiscal years were higher than the decadal average of 29.2%.

Two things stand out here.

First, growth stability, spillover from government investments in linked sectors, the Production Linked Incentive (PLI) scheme and subdued commodity prices have meant the contribution of the private sector is cautiously inching up, as evident in the improving share of GFCF from 27.3% in fiscal 2021.

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Second, this number is still well below the 34.3% seen in fiscal 2012, suggesting a strong push is needed from the private sector to meaningfully lift capex across conventional as well as new-age sectors.

The full budget for this fiscal year adds grist to this mill, through several small but relevant impetus to private sector capex, adding to previously announced structural reforms and manufacturing-focused interventions.

First, the thrust on infrastructure sectors has been retained with overall capex at ₹11.11 trillion. The multiplier effect of this will support demand for commodities such as steel and cement and is also in sync with India’s plan to improve its logistics efficiency.

Second, emphasizing the vision for energy transition provides support to India’s journey towards non-fossil fuels, which will allow the country to decarbonise while it pursues faster growth.

The taxonomy for climate finance will support the pursuit of relevant commitments and green transition. It will also aid the quest for 500 GW of installed non-fossil energy capacity by 2030.

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From the end-user industry perspective, the budget allowed rollover of nil duty for ferrous scrap for one more year. This will continue to improve the availability of import scrap and complement the long-term focus on reduction of carbon emission from the domestic steel sector.

Third, rationalization of import cost of critical minerals and raw materials through duty structure is a big positive. That enables cost reduction in the value chain in many new-age sectors and incentivises more value-addition domestically. For example, basic customs duty (BCD) on lithium and cobalt is reduced from 5% to nil. Now, battery cells form 80-85% cost of storage batteries. With these two minerals together forming 25-35% of cell cost, the reduction in BCD should enable 1-1.5% decline in production cost.

On the other hand, to incentivise domestic manufacturing in telecom equipment, BCD on specified printed circuit board has been increased from 10 to 15%.

Fourth, an employer-focused scheme will incentivise additional employment in all sectors and support companies in the form of reimbursement of contributions to the Employees’ Provident Fund Organisation to specified limits.

Fifth, a raft of calibrated measures was announced to ensure the working capital needs of micro, small and medium enterprises are addressed. Building in-house, technology-based underwriting models by public sector banks will help attract new-to-credit borrowers into the formal system.

Moreover, the limit for MUDRA loans has been doubled to ₹20 lakh for entrepreneurs who have repaid loans under the Tarun scheme, which accounts for one-fourth of all such credit.

Going ahead, while conventional sectors will continue to see an increase in investments, emerging sectors will do the heavy lifting.

For example, large manufacturers of steel and cement have started investing in capacity addition. Over the next four years, we estimate capacities in these sectors to increase by more than 30%.

In addition, emerging sectors, which have seen strong investment intent over the past few quarters, will witness more action on the ground. Sectors such as solar photovoltaic module manufacturing, electronics and battery manufacturing will lead capex here.

That means, persistent emphasis on PLI scheme and incentivising newer technology projects (such as recently announced viability gap funding for offshore wind projects) — leading to timely operationalisation of domestic capacities in new-age sectors — will continue.

PLI aims to promote private investments in strategic areas by paying out incentives of ₹1.97 trillion, targeting a capital expenditure of ₹3-3.25 trillion. Of this, ₹1.28 trillion has been invested till May 2024, led by pharmaceuticals, photovoltaic solar modules and automotive components.

The results are becoming increasingly evident as these policies mature, reflecting the government's efforts to invigorate the manufacturing sector.

That said, the fast-evolving global, technological and commodity dynamics will need to be watched closely.

The Economic Survey has rightly pointed out that the benefit India gets through the China-plus-one strategy, especially in emerging sectors, will come with a cost and will be gradual.

Increasing global trade friction is another potential challenge that can create trade disruptions, to which India is not immune.

So far, government policies, capex incentives and a favourable business cycle have been supportive. To sustain capex in the long run, the government needs to ensure continued improvement in ease of doing business and drive physical and digital infrastructure build out.

The policy paths can be recalibrated on the fly.

Amish Mehta is Managing Director and CEO, CRISIL Limited