Much is expected from the budget, especially in spending on infrastructure. Industry lobby group Confederation of Indian Industry has asked the finance minister to make the July budget an investment-oriented one.
The markets, too, are full of optimism and infrastructure-related sectors have outperformed the benchmark Sensex index on the Bombay Stock Exchange (BSE). While the Sensex is up around 28% since the beginning of May, BSE capital goods index has gone up by about 45%.
But government spending on capital expenditure has been falling as a share of the gross domestic product (GDP). Taking the total spending on capital expenditure from budget documents and the Central Statistical Organisation data on GDP at current prices, we find that government capital expenditure as a percentage of nominal GDP (not adjusted for inflation) reached a high of 4.3% in 2003-04 but fell to a low of 1.82% in 2006-07.
Clearly, the government’s preferred method of reducing the fiscal deficit has been to slash capital expenditure. For 2008-09, the revised estimates of the government’s capital expenditure amounted to a mere 1.97% of nominal GDP at factor prices. Moreover, out of this amount, as much as 42% was capital expenditure on defence items.
In the government’s interim budget for 2009-10, the increase in total capital expenditure over the revised estimates for 2008-09 is a mere 7.8%. In absolute terms, the increase is only Rs7,639 crore. Yet the increase in budgeted capital expenditure on defence is Rs13,824 crore, which means that the absolute level of capital expenditure without taking capex on defence into account is estimated to be lower than in 2008-09.
The capex to GDP ratio remained well above 3.5% in the late 1990s, fell a bit in the early 2000s, and was very high in 2003-04 and 2004-05 before plunging down. Ahmed Raza Khan / Mint
It’s worth noting that capital expenditure on defence is as high as 50% of total capex in the budget estimates for 2009-10 in the vote-on-account and it was 42% of total capex for 2008-09. But defence capex was as low as 15% in 2003-04, when the capex to nominal GDP ratio was a high 4.3%.
What’s more, the budgeted expenditure for 2009-10 in the vote-on-account was Rs1.05 trillion, which is lower than the Rs1.13 trillion of capex as far back as 2004-05 and also lower than the Rs1.09 trillion of total capex in 2003-04. That indicates investment spending in 2003-04 was much higher.
Clearly, government spending in the forthcoming budget must be far more than that outlined in the vote-on-account if the capex to GDP ratio is to be anywhere near the levels reached in 2003-04 or 2004-05.
The chart also shows that the capex to GDP ratio remained well above 3.5% in the late 1990s, fell a bit in the early 2000s, and was very high in 2003-04 and 2004-05 before plunging down. It’s likely that the high capital expenditure by the government in 2003-04 and 2004-05 laid the groundwork forthe spurt of growth that followed.
If the economy is to be pulled out of the slump, a similar effort is necessary. How the government will raise capital expenditure without sending the fiscal deficit through the roof, though, is the key dilemma for the finance minister.
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