5 times jump in capex under the Modi government! Here’s what it means for you and the Indian economy
In an interview with BT, Mukesh Kochar, National Head–Wealth at AUM Capital, decodes what the surge in government spending means
- Sep 1, 2023,
- Updated Sep 1, 2023 11:48 AM IST
Total capital expenditure under the Narendra Modi government has surged over 5 times to Rs 10 lakh crore since FY14. At the same time, subsidies have grown by 58 per cent. In contrast, capital outlay under the Manmohan Singh government during FY04-14 increased by 72 per cent, while subsidies witnessed a jump of 474 per cent. So, what does the sharp rise in capital expenditure under the present government mean for you and the economy? And which sectors will continue to benefit? In an interaction with Business Today, Mukesh Kochar, National Head–Wealth, AUM Capital, shared his insights. Edited excerpts:
BT: What does the sharp rise in the capex since the BJP came to power in FY14 mean for the economy?
Kochar: This is the new India, and it is making a tremendous difference to the economy of the country. The government’s capital expenditure is always followed by the private sector’s capital expenditures, which are the fuel for an economy’s growth. When self-sustainability is achieved, it will be possible to reduce subsidies only when they are self-sustaining. All efforts have been made to increase spending on capex to fuel economic growth to a large extent, and all of these efforts have resulted in a significant increase in the spending on capex.
BT: Which sectors do you think are benefiting from rising capex?
Kochar: Those with a vested interest in cement, steel, railways, EPC companies and the entire manufacturing sector will likely profit from the reform. Thus, taking a proactive approach to securing your future is essential.
BT: What do soaring bond yields in the developed market indicate for developing economies, especially India and China?
Kochar: The US yield is trading at close to a multiyear high. The US Treasury yield has moved sharply up in the last couple of weeks because of the fear of a rate hike at the next Fed policy meeting on September 20. This on the one hand gives strength to the US dollar against other currencies and the dollar index may move towards 106-107 putting pressure on the currencies. At the same time, there might be some dollar outflows from emerging markets as the differential yield becomes narrow or unattractive. China is an export-based economy and might benefit from it. On the other hand, India is import-dependent but RBI has been able to manage the volatility in forex very well.
BT: The dollar index has climbed over 4 per cent from its 2023 low of 99.46, scaled on July 13. What does this increase mean for the Indian economy?
Kochar: The US 10-year Treasury yield is around 4.25 per cent and the Indian 10-year yield is around 7.20 per cent. As a result, the yield differential between the two countries is now less than 300 basis points, which is historically low. In the next policy, the Fed is expected to raise interest rates, thereby strengthening the dollar. On the other hand, the RBI is expected to pause. This will further increase pressure on the rupee. A higher exchange rate is always bad for a country like India that imports a lot. However, we have seen the RBI step in when needed to stabilise the rupee’s movement. We expect RBI to use liquidity management tools instead of interest rates to counter wartime inflation and interest rates.
BT: Where do you see the Indian rupee by the end of 2023?
Kochar: In the near term, the rupee could see pressure on the Fed’s expected rate hike and it is important to see how the upcoming US inflation and growth data unfold. However, we expect some easing towards the end of the year until the Fed pauses in the rate hike cycle. The RBI has done a great job of reducing volatility and has been instrumental in making the rupee more stable than most other world currencies. We believe that 83.10 is a very crucial level for the rupee and if it breaks through if the same happens there is more room for further rupee depreciation.
BT: Why did the rupee weaken the most compared with the dollar, while it stood relatively firm compared with the Yen and Euro?
Kochar: The rupee was trading at around 79.60 in August 2022 and is currently around 82.61. It has thus lost about 3.8 per cent in value over the last year. It is normal for the rupee to depreciate by around 3-4 per cent every year due to the difference in interest rates and inflation. The Japanese government kept the rate low at -0.10 per cent, while India hiked its Repo rate to 6.50 per cent from 4 per cent. The Japanese Yen lost about 4.75 per cent against the Dollar while the Euro gained about 9 per cent as it was oversold and at the same level this time last year.
BT: How do you see consumer inflation going ahead? What do you expect from RBI MPC going ahead?
Kochar: Recent inflationary pressures of 7.44 per cent were mainly attributed to food inflation. I believe food inflation is always temporary. We have seen vegetable prices cool off lately due to the harvest. The government is also taking steps to normalise the situation by raising export tariffs or increasing supply. However, inflation is expected to remain between 5 per cent and 6 per cent for the rest of the year. We expect the RBI to pause on their next policy and watch the data closely. The RBI is resorting to reducing system liquidity at this point, suggesting it is considering a pause in the next policy and will not make a rushed decision.
BT: How do you see India’s economic growth going ahead?
Kochar: India is currently in a sweet spot in terms of global positioning, capital flow, capex, and strong leadership. This decade belongs to India and we are going to double the size of the economy in this decade. So, you can imagine the kind of growth India can deliver. The base GDP is increasing and so is the overall size. Whenever any economy moves towards $3 billion to $5 trillion in GDP, tremendous wealth gets created.
Total capital expenditure under the Narendra Modi government has surged over 5 times to Rs 10 lakh crore since FY14. At the same time, subsidies have grown by 58 per cent. In contrast, capital outlay under the Manmohan Singh government during FY04-14 increased by 72 per cent, while subsidies witnessed a jump of 474 per cent. So, what does the sharp rise in capital expenditure under the present government mean for you and the economy? And which sectors will continue to benefit? In an interaction with Business Today, Mukesh Kochar, National Head–Wealth, AUM Capital, shared his insights. Edited excerpts:
BT: What does the sharp rise in the capex since the BJP came to power in FY14 mean for the economy?
Kochar: This is the new India, and it is making a tremendous difference to the economy of the country. The government’s capital expenditure is always followed by the private sector’s capital expenditures, which are the fuel for an economy’s growth. When self-sustainability is achieved, it will be possible to reduce subsidies only when they are self-sustaining. All efforts have been made to increase spending on capex to fuel economic growth to a large extent, and all of these efforts have resulted in a significant increase in the spending on capex.
BT: Which sectors do you think are benefiting from rising capex?
Kochar: Those with a vested interest in cement, steel, railways, EPC companies and the entire manufacturing sector will likely profit from the reform. Thus, taking a proactive approach to securing your future is essential.
BT: What do soaring bond yields in the developed market indicate for developing economies, especially India and China?
Kochar: The US yield is trading at close to a multiyear high. The US Treasury yield has moved sharply up in the last couple of weeks because of the fear of a rate hike at the next Fed policy meeting on September 20. This on the one hand gives strength to the US dollar against other currencies and the dollar index may move towards 106-107 putting pressure on the currencies. At the same time, there might be some dollar outflows from emerging markets as the differential yield becomes narrow or unattractive. China is an export-based economy and might benefit from it. On the other hand, India is import-dependent but RBI has been able to manage the volatility in forex very well.
BT: The dollar index has climbed over 4 per cent from its 2023 low of 99.46, scaled on July 13. What does this increase mean for the Indian economy?
Kochar: The US 10-year Treasury yield is around 4.25 per cent and the Indian 10-year yield is around 7.20 per cent. As a result, the yield differential between the two countries is now less than 300 basis points, which is historically low. In the next policy, the Fed is expected to raise interest rates, thereby strengthening the dollar. On the other hand, the RBI is expected to pause. This will further increase pressure on the rupee. A higher exchange rate is always bad for a country like India that imports a lot. However, we have seen the RBI step in when needed to stabilise the rupee’s movement. We expect RBI to use liquidity management tools instead of interest rates to counter wartime inflation and interest rates.
BT: Where do you see the Indian rupee by the end of 2023?
Kochar: In the near term, the rupee could see pressure on the Fed’s expected rate hike and it is important to see how the upcoming US inflation and growth data unfold. However, we expect some easing towards the end of the year until the Fed pauses in the rate hike cycle. The RBI has done a great job of reducing volatility and has been instrumental in making the rupee more stable than most other world currencies. We believe that 83.10 is a very crucial level for the rupee and if it breaks through if the same happens there is more room for further rupee depreciation.
BT: Why did the rupee weaken the most compared with the dollar, while it stood relatively firm compared with the Yen and Euro?
Kochar: The rupee was trading at around 79.60 in August 2022 and is currently around 82.61. It has thus lost about 3.8 per cent in value over the last year. It is normal for the rupee to depreciate by around 3-4 per cent every year due to the difference in interest rates and inflation. The Japanese government kept the rate low at -0.10 per cent, while India hiked its Repo rate to 6.50 per cent from 4 per cent. The Japanese Yen lost about 4.75 per cent against the Dollar while the Euro gained about 9 per cent as it was oversold and at the same level this time last year.
BT: How do you see consumer inflation going ahead? What do you expect from RBI MPC going ahead?
Kochar: Recent inflationary pressures of 7.44 per cent were mainly attributed to food inflation. I believe food inflation is always temporary. We have seen vegetable prices cool off lately due to the harvest. The government is also taking steps to normalise the situation by raising export tariffs or increasing supply. However, inflation is expected to remain between 5 per cent and 6 per cent for the rest of the year. We expect the RBI to pause on their next policy and watch the data closely. The RBI is resorting to reducing system liquidity at this point, suggesting it is considering a pause in the next policy and will not make a rushed decision.
BT: How do you see India’s economic growth going ahead?
Kochar: India is currently in a sweet spot in terms of global positioning, capital flow, capex, and strong leadership. This decade belongs to India and we are going to double the size of the economy in this decade. So, you can imagine the kind of growth India can deliver. The base GDP is increasing and so is the overall size. Whenever any economy moves towards $3 billion to $5 trillion in GDP, tremendous wealth gets created.