Public Spending-Led Growth Unsustainable: Rajiv Kumar

"There are serious limitations to public expenditure-led growth. It is unsustainable, given the fiscal constraints. Then the government has to rely more on private investment and more needs to be done to promote investments,” Rajiv Kumar, Chairman, Pahle India Foundation and former Vice-Chairman, NITI Aayog, told The Secretariat.

Though the investment ratio or the gross fixed capital formation (GFCF) to GDP ratio had increased in 2024 — it was 34.7 per cent in September 2024 — private sector investment is yet to pick up. The index had touched an all-time high of 41.2 per cent in September 2011, while it had sunk to a record low of 21.8 per cent in June 2020, amid the Covid 19 lockdown.

The figure for 2023-24 was 34 per cent. According to Morgan Stanley, it is expeted to rise to 36 per cent of the GDP by financial year 2027.

Kumar said the government must ensure that this figure increases significantly. “Public expenditure led growth will take us back to the socialist era. The government needs to be seen as one which is a lot more private investor friendly,” he added.

“The investment to GDP ratio needs to be pushed to over 40 per cent for achieving 8 per cent plus GDP growth,” Kumar said, adding that with the present growth rate India will not be able to achieve the developed nation status by 2047.

An EY report said that until FY2023-24, more than Rs 31 trillion was locked in Income Tax litigation, amounting to 9.6 per cent of India’s GDP for the year.  Analysts have underlined the need to bring in reforms in the area of tax dispute resolutions with the aim to bring in more certainty and transparency. This is key to push private investments.

Despite the government announcing several measures such as the production linked investment (PLI), implementation of the PM Gati Shaki — aimed at easing logistics under the flagship Make-in-India programme it has failed to boost private sector investments.

Currently, 14 sectors are covered under the PLI scheme. It is likely that the scheme is extended to more sectors. Though the government has undertaken reviews of the outcome of the scheme, they are not available to the public at large. The scheme has worked well for a few industries such as the electronics sector which includes manufacturing and assembling of smart phones.

According to official statement, as of August 2024, the actual investments under the PLI programme amounted to Rs 1.46 lakh crore. However, sources said that the PLI scheme needs to yield "much more." For instance, the scheme in the automobile sector is yet show the desired results.       

All Eyes On The Union Budget

At present, India’s economic growth is primarily driven by government spending. While Finance Minister Nirmala Sitharaman is expected to further enhance public spending to spur the sagging economic growth, she is also likely to announce steps to incentivise the private sector to open their purse strings and invest more.

“This is a focus area for the government, we have always been proactive in taking necessary steps to remove existing hurdles for the private sector to invest more while improving ease of doing business. We will take more steps. We are pro-business,” a senior government official on condition of anonymity said.

China’s investment to GDP ratio as per latest data was above the 40 per cent mark.

Though in 2019, Sitharaman slashed corporate taxes from 30 per cent to 22 per cent with an eye to boost investments from companies, the private sector, by and large, has refrained from big ticket investments.

India’s private sector will have to play a more crucial role in the economic journey especially if it has to achieve the developed nation status by 2047.

According to a report by S&P, the private sector will have to shoulder more investment responsibility as India’s fiscal settings are constrained. It pointed out that the government infrastructure buildouts and household investments have supported India’s post-pandemic recovery. But a broad-based recovery in private sector corporate investments is yet to materialise.