The Centre’s capital expenditure allocation is expected to go up in the budget; it’s time states also do their bit
While not wanting to cut back too much in what is the last full-fledged Budget before the elections, it is unlikely the government would want a fiscal deficit of more than 5.9% of GDP.(IE)
At a time when the economy is set to lose momentum and aggregate demand growth looks iffy, companies in the private sector would hardly want to invest large sums to enhance capacities. While there has been a pick-up in private sector capex in recent quarters, some part of this, experts say, is replacement capex of the past few years, which has been lumped together and will soon run its course. Moreover, while the data points to increasing investment intentions these are not yet broad-based. So while sectors such as renewable and electric vehicles are attracting investments, a new cycle is yet to take off. In the meantime, the Centre has done a remarkably good job of spending on capex. Of the targeted amount of Rs 7.5 trillion, including a support of Rs 1 trillion to states, 60% had been utilised by end-November, aided by releases to the states. Thanks to chunky spends by the railways and the National Highways Authority of India, the gross fixed capital formation has held up—GFCF came in at 34.7% in Q1 FY23 and at 34.6% in Q2 FY23 compared with 32.5% in FY22.
On the other hand, states have been somewhat tardy in this department. For a clutch of 18 states, capex grew at a modest 7.5% in the April-November period to Rs 2.41 trillion. To be sure, the pace could pick up in the last few months of the year but spends so far are way behind the targetted Rs 6.3 trillion. The states must buck up because the macro-environment next fiscal could worsen making it difficult for the Centre to push up its capex spends. For one, nominal gross domestic product growth in FY24 will be far lower at just about 10% compared with a robust 14-15% in the current year. Consequently, the fiscal correction needed to ensure that public debt doesn’t rise to even more uncomfortable levels, would limit total expenditure.
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While not wanting to cut back too much in what is the last full-fledged Budget before the elections, it is unlikely the government would want a fiscal deficit of more than 5.9% of GDP. It would be mindful that of the elevated debt levels and that the cost of borrowing—in the bond markets—will be higher next year. Most importantly, it would not want to crowd out private sector borrowings at a time when savings are slowing and interest rates are elevated. Assuming a Budget size of Rs 43.5 trillion, therefore, a back of the envelope calculation shows the allocation for capex next fiscal could be in the region of Rs 8.6 trillion, about 15% more than the current year’s budgeted Rs 7.5 trillion.
In an interesting analysis, Goldman Sachs has found that historically, India’s budgets have seen an increase in allocations for the infrastructure segment, essentially roads and railways, in years that precede an election. However, this is typically accompanied by a cut in the defence budget. In FY19, for instance, the allocation for defence was pruned while that for infrastructure went up sharply to 40% of the total capex budget from the average of 29% in the preceding three years. This time around, though, the government might be compelled to increase the expenditure on defence equipment. Nonetheless, a total capex allocation of Rs 8.6 trillion is reasonably good, if spent well. It’s important for states do their bit.