The government has admitted that the release of “pent-up” demand is driving a significant part of the economy.
In the latest Economic Survey released on Tuesday (January 31), the government said the rebound in consumption has also been supported by the release of “pent-up” demand, a phenomenon not unique to India but exhibiting a local phenomenon influenced by a rise in the share of consumption in disposable income. In the case of the housing market, the demand for housing loans has increased while house inventories have declined.
Since the share of consumption in disposable income is high in India, a pandemic-induced suppression of consumption built up that much greater recoil force. Hence, the consumption rebound may have lasting power. Moreover, accelerating growth in personal loans in India testifies to an enduring release of “pent-up” demand for consumption.
The RBI’s most recent consumer confidence survey released in December 2022 pointed to improving sentiment concerning current and prospective employees and income conditions. The “release of pent-up demand” was also reflected in the housing market. The demand for housing loans picked up. Consequently, housing inventories have declined, prices are firming up, and construction of new dwellings is picking up pace.
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This has stimulated innumerable backward and forward linkages that the construction sector is known to carry. The universalisation of vaccination coverage also has a significant role in lifting the housing market as, in its absence, the migrant workforce could not have returned to construct new dwellings.
Apart from housing, construction activity in general has significantly risen in FY23, as the much-enlarged capital budget (capex) of the central government and its public sector enterprises is rapidly being deployed. As a result, going by the capex multiplier estimated for the country, the country’s economic output is set to increase by at least four times the amount of capex.
Capex thrust part of strategic package
States, in aggregate, are also performing well with their capex plans. Like the central government, states have a larger capital budget supported by the centre’s grant-in-aid for capital works and an interest-free loan repayable over 50 years.
A capex thrust in the last two Central budgets was not an isolated initiative meant only to address the infrastructure gaps in the country. Instead, it was part of a strategic package aimed at crowding-in private investment into an economic landscape broadened by the vacation of non-strategic PSEs (disinvestment) and idling public sector assets.
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Three developments support this. The first is the significant increase in the capex budget in FY23, as well as its high rate of spending.
Second, direct tax revenue collections have been highly buoyant, and so have GST collections, which should ensure the full expending of the capex budget within the budgeted fiscal deficit. The growth in revenue expenditure has also been limited to pave the way for a higher increase in capex.
Third is the pick-up in private sector investment since the January-March quarter of 2022. Evidence shows an increasing trend in announced projects and capex spending by private players. Surveys of leading industry CEOs also reveal their plans and commitment to increasing capex.