Will the government be able to meet its capex target for FY25?

While the general elections brought disruptions earlier in the fiscal year, the pace of capex failed to pick up significantly after the new government took charge. Photo: Bloomberg
While the general elections brought disruptions earlier in the fiscal year, the pace of capex failed to pick up significantly after the new government took charge. Photo: Bloomberg

Summary

  • The pace of capital expenditure has been slow this fiscal year despite the government having budgeted moderate 17.1% growth, against an average increase of nearly 30% between FY21 and FY24.

A month ahead of the budget presentation, the union government is considering a plan to ease conditions states to obtain 50-year interest-free loans for capital expenditure in an effort to close in on its target for 2024-25. The union government's capex, which it has used to stimulate the economy since the covid-19 pandemic, has been lacklustre this year, having hit only 48% of the budgeted amount as of November.

The pace of capital expenditure has been slow this year despite the government having budgeted moderate 17.1% growth, against an average increase of nearly 30% between FY21 and FY24. Not only is capex growth lower this year, the union government has directed more capex towards the states. 

Also read: How India’s services sector made history as goods exports floundered

According to budget documents from July 2024 the government's capex was estimated to grow 14%, while transfers (which include capex loans to states) were estimated to grow 37%. The full budget also lowered the government's capex by 2% and increased transfers by 14% from the interim budget, highlighting the limitations of the union government in carrying out massive capex.

This has played out in the capex trend this fiscal year. While the general elections brought disruptions earlier in the year, the pace of capex failed to pick up significantly after the new government took charge. Between April and July, capex was down 17.6% year-on-year. While capex improved slightly from there, it was still 6.5% lower between August and November.

Over to the states

States’ capex track record this year has also been poor due to the general elections and assembly elections in several states. According to a report by ICRA, the combined capex of 20 major states was down 2.7% year-on-year in April-November. Of the budgeted outlay for transfers to states, only 49.3% was done as of November, slightly better than 48.6% last year, but still behind other ministries that carry out major capex. Nearly all major ministries have seen slower progress on capex.

The plan to ease norms for states is aimed at providing a last-minute boost to dwindling capex amid a slowdown in GDP growth to 5.4% in July-September from 6.7% in the previous quarter. The states have long demanded relaxation of norms to carry out capex.

Also read | Budget 2025 preview — Part 1: Fiscal deficit, FDI, disinvestment, energy issues

According to a Mint report, states may see a relaxation in some of the required reforms such as scrapping old government vehicles and ambulances, improving urban planning and finance, building housing for police personnel, and establishing libraries with digital infrastructure at the panchayat and ward level for children and young adults.

Inevitable shortfall

The outlay for capex via transfers is nearly 15% of the total budgeted figure of ₹11.11 trillion, which could make a slight difference if fully utilised. However, going by the current average monthly capex of ₹642 billion, the union government would only be able to carry out capex worth ₹7.7 trillion. Since capex is expected to pick up the pace in the last quarter, the figure may end up being higher, but it's unlikely to hit the ₹11.11 trillion target. “Despite the anticipated pick-up, we project capex to reach only ₹ 9.6 trillion, missing the full-year target," CareEdge said in a report last month.

Also read | The week in charts: Weak capex, FPI stress, consumption cracks

While the union government has relied heavily on capex to support growth since the pandemic, questions have been raised about the economy’s capacity to absorb massive public capex. The government ended FY23 and FY24 with actual capex lower by 1.4% and 5.5%, respectively.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

topics

MINT SPECIALS