Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Govt has increased capex this year, but is it enough?

Even as budget math gets tougher, focus on public investment should continue

New Delhi: As recovery for private investment demand sags, the central government has stuck to its promise of boosting capital expenditure. At least till now. April-December spending numbers show that capital expenditure, or capex, as a percentage of budget estimates is at its highest in five years. The jump in capex is more than the one-quarter increase over the previous year’s revised estimates that the government had budgeted for.

But is that enough when overall investment sentiment remains bearish?

The share of gross fixed capital formation in economic output for the December quarter was at its lowest since June 2011, the earliest period for which data is available under the new GDP series. What makes this trend more worrisome is the fact that new investment announcements during April-December 2015 have declined from a year ago, even for the government sector.

What’s more, the budget arithmetic is going to get tougher.

In the current fiscal year, the government enjoyed the benefits of lower commodity prices. According to some estimates, incremental oil sector revenue was 1 trillion more than a year earlier, as the government repeatedly raised excise taxes. Oil prices don’t have much to fall further so there will be no such windfall in fiscal 2017. At the same time, there will be additional strain on government finances, owing to the seventh pay commission and one rank one pension scheme.

However, it makes strong economic sense to step up capital expenditure. A December 2015 working paper of the International Monetary Fund has argued that public investment has been crowding in rather than crowding out private investment in India in the last three decades. Under one of the paper’s models a one rupee increase in public investment crowds in private investment by 0.30, 1.24, and 1.07 rupees after four, eight, and 12 quarters, respectively.

Similarly, a 2013 paper by Sukanya Bose and N. Bhanumurthy at the National Institute of Public Finance and Policy found that for every rupee spent on capital formation by the government, additional income generation was to the tune of 2.45. For transfer payments and subsidies, additional income generation was just one rupee. We will know on Monday whether finance minister Arun Jaitley had this extra 1.45 in mind while making the budget.