Private Sector Expected to Drive Capital Expenditure Growth as Government Eases Spending

The Indian government has announced the capital expenditure outlay for FY24-25 at ₹11.11-lakh crore, representing an 11% increase over the previous year’s budget announcement. This marks a return to normalised growth in spending after several years of high capital expenditure growth by the government. The increased spending is expected to support the private sector in driving capital expenditure growth.

According to a recent report by the Department of Economic Affairs, private capital expenditure has grown at a compound annual growth rate (CAGR) of 8.5% in FY19-23, reaching ₹6 lakh crore. This growth is expected to further accelerate with lower borrowing costs and stronger balance sheets once interest rate cuts begin in FY25.

The lower borrowing needs of the government, as indicated by the revised fiscal deficit targets, will create more scope for private borrowing. The fiscal deficit for FY24 is announced at 5.8%, 10 basis points lower than expected, and is expected to further reduce to 5.1% in FY25. This indicates a strong resolve to rein in government borrowings and offers a positive outlook for private borrowing.

The improved balance sheets of private companies also contribute to the positive outlook for private capital expenditure. Companies have reported multi-year high return on equity (RoE) and improved leverage metrics. Earnings before interest, tax, depreciation, and amortization (EBITDA) margins have also expanded, providing room for further investments for growth.

Additionally, the government’s continued investment in core sectors such as affordable housing, railways, roads, and logistics will support demand growth for India Inc. The private sector now has the opportunity to fill the gap left by the government in terms of momentum in capital expenditure growth. With strong balance sheets, lower borrowing costs, and supportive government policies, the private sector is expected to lead the way in driving capital expenditure growth.