Emphasis on capital expenditure to boost economic growth

- Bad impact on investment seen in India like other parts of the world after the global financial crisis

The government is emphasizing capital spending to boost economic growth after the end of the pandemic. The idea behind it is that with the help of government capital expenditure, not only the necessary infrastructure but also economic activities will be boosted which will induce the private sector to invest. However, many states have lagged behind in this regard and have been able to reach only a quarter of the target set for the year. A comprehensive study by the World Bank has once again underlined the role of investment in driving economic growth. The study was published in the latest Global Economic Outlook report. After the global financial crisis, investment in India, like other parts of the world, was adversely affected.

India faced a dual balance sheet problem where both corporate and banks' balance sheets were under pressure. We have now fully recovered from that period and private investment is also showing signs of improvement. However, how durable it proves to be remains to be seen.

The World Bank studied 104 economies between 1950 and 2022, including 35 developed and 69 emerging market and developing countries. As the study shows, output growth in emerging markets and developing economies increased by 5.9 percent per year while investment accelerated. Which was 1.9 percent more than other years. The empirical analysis and case studies contained in the report yield three key observations about the role of policies in raising investment rates that are worth mentioning here.

First, policy interventions to improve macroeconomic stability, such as efforts to reduce the fiscal deficit and inflation targeting, and structural reforms have proven helpful in increasing investment. It also includes interventions to facilitate international trade and ensure the flow of capital.

Second, specific policy interventions have their role to play, but a comprehensive package of policy interventions that ensure greater macroeconomic stability and focus on structural issues will enhance investment growth prospects.

Third is the role of institutions, for example their proper functioning and independent legal system is very important. It is understood that an active judicial system instills confidence in investors and entrepreneurs as contracts are easy to enforce.

In this context, it is worth noting that macroeconomic stability in India is at a relatively good level. However, there is an increased fiscal deficit partly due to an increase in government capital expenditure in an effort to boost investment. The government will soon have to answer a difficult policy question: at what point should it start making room for the private sector? While India's capital mobility remains strong, there have been some difficulties on the trade front in recent years due to rising tariffs, which some economists believe could affect long-term growth.

The study also highlights how the reforms initiated by India in the 1990s boosted growth and investment in that decade. The global economy is expected to grow at a slower pace in the near term and investment growth worldwide has slowed in recent years, so Indian policymakers may need to take additional steps to facilitate growth and investment in the medium term.