Mint Primer: Is India Inc’s call for more public capex justified?

Between FY19 and FY25, government capex has risen from  ₹3 trillion (1.6% of GDP) to  ₹11.11 trillion (3.4%)
Between FY19 and FY25, government capex has risen from 3 trillion (1.6% of GDP) to 11.11 trillion (3.4%)

Summary

  • Speaking to the media last week, CII president Sanjiv Puri sought a 25% increase in government capital expenditure from the 11.11 trillion allocated in the 2024-25 interim budget

Confederation of Indian Industry (CII) president Sanjiv Puri wants a substantial hike in the already-high government capital expenditure. However, experts suggest it’s time India Inc did some heavy lifting and invested to support economic growth. Mint explains the issue:

What is industry’s demand?

Speaking to the media last week, CII president Sanjiv Puri sought a 25% increase in government capital expenditure from the 11.11 trillion allocated in the 2024-25 interim budget. This, he said, was needed to make the rural sector, which is yet to recover fully from the pandemic as evident from the poor and uneven demand, more resilient. The additional funds, he said, can be deployed for housing, agriculture, warehousing and irrigation. The increase CII has sought will cost the government 2.78 trillion more, taking capex as a share of gross domestic product (GDP) from the existing record 3.4% to 4.25%.

Also read: Why India Inc’s capex plans slowed down in FY24

Why is the demand surprising?

Three of the four engines of economic growth—government spending, private consumption and exports—have contributed significantly recently. The fourth, private investment, has remained sluggish for years despite the government’s attempt to pump-prime it by way of high government capex. Between FY19 and FY25, government capex has risen from 3 trillion (1.6% of GDP) to 11.11 trillion (3.4%). The government, in September 2019, reduced the corporate tax rate sharply hoping to catalyze private investment. Despite these efforts, the private sector’s reticence to invest heavily continues.

How is this impacting fiscal consolidation?

High capex spending moved with fiscal deficit. In FY19, capex stood at 3 trillion and the fiscal deficit at 3.4% of GDP. Post-covid, the Centre increased capex and the fiscal deficit stayed much higher than the 3% limit set by the Fiscal Responsibility and Budget Management Act (see chart). Further reduction in the fiscal deficit is not possible if this capex spending continues.

Also read: Why the Centre’s PSE capex story isn’t as rosy as it sounds

Should the private sector do more?

One of the main reasons for private investment not taking off was surplus capacity. Thanks to revival in demand, both domestic (especially urban) and exports, average capacity utilization has crossed 75%. In select sectors it has exceeded 85%, levels at which capacity expansions are typically greenlit. Corporate balance sheets are much healthier now as debt piled up for expansion has been repaid. Banks too have cleaned their books and are primed to lend. Experts say the time is right to start investing again.

Will the government heed India Inc’s call?

Unlikely. Allocating funds for capex is one thing—the ability to utilize it is another. In FY24, 10 trillion was allocated but only 9.49 trillion was spent. In the interim budget 11.11 has been allocated, an 11% increase. It remains to be seen if it will be fully utilized. Also, the government is keen on fiscal consolidation and wants a fiscal deficit of 4.5% by FY26. The central government may maintain its capex at the current level of 3.4% of GDP but will incentivize states and public sector enterprises to spend more. (edited)

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