Read the fine print on govt's big capital expenditure

Now with next year’s Budget approaching, the government is likely to raise its capex plan further—according to a Mint report, it could go up from ₹7.5 trillion in FY23 to ₹10 trillion in FY24. The numbers are eye-catching, but the details suggest a different story. Reading the fine print is important to assess the extent to which a capex boost can propel the economy.

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Take the ₹7.5-trillion plan for FY23. It included ₹1 trillion in interest-free loans for states undertaking capital works. Excluding that, and after adjusting for capital infusion in Air India last year, the planned capex growth was 20.4% against 30.1% in FY22. But resources allocated to public enterprises (which funds their capex) saw a 6.6% decrease. These two heads together were up by just 7.3% in a year when wholesale prices have risen 14.2% and retail prices 7.2%.

While continued support to the economy by the Centre is needed, the growth story will be incomplete without state governments and the private sector, as well as a sustained revival in consumption, economists believe.

Reluctant corporates

The lack of private investments is an old story, going back a decade ago. During this period, several steps including corporate tax cuts have been announced to lift the animal spirits. During the covid-19 disruptions, interest rates were down at record lows and the system was flush with liquidity. And while companies made record profits during the period, they chose to repair their balance sheets instead of investing further. Economists often point out that corporate tax cuts came at a time when consumption was faltering, and without a sustained revival in consumption, companies could not be expected to invest. “The government is only an enabler, it can put right policies in place, but companies’ investment decisions will depend on business opportunities," said Madan Sabnavis, chief economist at Bank of Baroda. As high inflation has crimped purchasing power, evident from companies’ inability to pass on input costs to consumers, broad-based revival in private investment is unlikely anytime soon, economists said.

States struggle

Meanwhile, states’ capex is also behind target despite nudges from the Centre. While the Centre has spent 46% of its capex plan in the six months till September, no major state comes close, despite having fiscal space to spend more than their Budgeted amount. Thirteen major states have a massive combined fiscal space of ₹7.4 trillion for capital spending in 2022-23, 29% over their budgeted ₹5.8 trillion, ICRA said in a report last month. The analysis takes into account unconditional market borrowing of 3.5% of GSDP and the interest-free capex loan by the Centre. States have struggled with faster execution of capex for years and the loans come with stringent rules that could slow it further. Some Opposition-ruled states have also expressed worries that capex loans might, under the Article 293(3) of the Constitution, force them to seek the Centre’s permission for raising any further loans until outstanding loans are not cleared.

Diversify spending

The proposed capex loans to states, around 15% of the total budgeted capex, were the cornerstone of the spending plan this year, but the transfers were a meagre 5% of the full-year amount till September. Since a number of factors are limiting private investments, states’ capex and consumption demand, the Centre may have to look at its own spending patterns to push for better results.

The sizable capex allocation was limited to only a few ministries, led by roads, defence, railways. “The government is spending majorly upon roads, highways, railways for many years, and not taking risks in other segments, which raises issues about the efficiency and productivity of public investments," said Renu Kohli, a Delhi-based macroeconomist. “It needs to identify newer areas such as clean energies and green infrastructure including grid upgradation, among others, to make sure public spending plays a vigorous role in the economy."

While the Centre, despite its limited fiscal space, will have to continue the capex, a hard look at its composition is needed to get the desired impact.

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