Economy
The surprising gap in India’s capex binge
Summary
- The central government’s capital expenditure has been on a tear—India is building more and more highways and roads. Such spending is important for job creation and “crowding-in” private investments. Nonetheless, interesting shifts underpin this increase. What are those?
New Delhi: One of the biggest headlines in government economic policy in recent years has been its focus on capital expenditure. Budgeted expenditure classified by the government as capex is projected to increase to about ₹11 trillion in 2024-25—almost 4.5 times the level in 2014-15. It represents 3.4% of projected GDP, up from 2% nine years ago.
Capital expenditure is seen as the building of assets that yield social and economic benefits over time—for example, road, bridges and ports. Increasing the share of government capex in overall spending has been an elusive goal for much of the reform period. Successive governments, when faced with the task of meeting fiscal deficit targets, have taken the axe to capital expenditure rather than revenue expenditure (running expenditure on items like salaries and interest payments on debt that don’t yield a future benefit).
Thus, the capex push by the government in the last few years is a welcome break from this tradition.
“This substantial increase in recent years is central to the government’s efforts to enhance growth potential and job creation, crowd-in private investments, and provide a cushion against global headwinds," finance minister Nirmala Sitharaman said, in her budget speech last year.
But where is this money going and what is it being spent on? While the rise in expenditure labelled by the government as capex has undeniably risen, it’s also worth putting this increase in perspective, and looking at the structural shifts that underpin this increase, especially as some of them take away some sheen from the headline numbers.
Centralizing Capex
Apart from the government budget documents, capital expenditure data is also compiled by the National Statistical Office (NSO) to calculate gross domestic product (GDP) estimates. Importantly, the NSO doesn’t just look at central government budget data. It also compiles capex by the central public sector enterprises (PSEs), whose spending is not part of the main government budget. It compiles capex for governments at both the central and state levels.
As chart 1 shows, a renewed focus on government capex has been long overdue. The entire reform period has seen a secular decline in public sector capex to around 6-8% of GDP, from levels of well above 10-11% of GDP in the 1980s. As an aside, what is also alarming is the steep decline in private sector capex since the global financial crisis of 2008. Importantly, the private sector never really recovered from that crisis and its after-effects.
The government has had to step in. The government budget measures just that—what the government raises through taxes and other sources of revenue, and what it spends directly. Government budgets do not cover public sector enterprises or bodies that are ‘owned’ by the central government, since they exist as separate legal and corporate entities, though the budget documents do contain information on the capital spending by such organizations. Any reasonable overview of public sector capex, even if it is only at the central government level, should cover both the main government, and public sector enterprises or bodies that are majority owned by the central government, and the amount that such entities, distinct from government, spend from their own resources or borrowings.
Seen from this perspective, there is still a substantial bump in recent years (chart 2). Add in PSE capital spends to the mix (from their own resources), as compiled by budget documents, and overall central government capex rises to over ₹14.5 trillion.
But seen in the context of overall GDP, the sharp bump in absolute terms looks less impressive—even in the context of the last decade or so. Combined central government capex (main government plus PSEs) is budgeted at around 4.4% of GDP for 2024-25—that’s still lower than the level 10 years ago.
But chart 2 also highlights a structural shift. Till as recently as 2020-21, PSE capex kept pace with the capex of the main central government in absolute terms. In the last few years, however, main central government capex has far outstripped PSE capex even as the latter has, in absolute terms, declined. Thus, even as overall capex has risen in recent years, it has become more centralized.
Repurposing Capex
A stark example of this is National Highways Authority of India (NHAI), which builds, or funds the building of, highway projects across the country. In 2021-22, it budgeted a spend of ₹1.22 trillion on such projects, of which, over half was to be funded by itself (largely through borrowing). Since 2022-23, however, all of NHAI’s funding was done directly through the government budget. It was not allowed to borrow any funds directly from the market, the aim being to keep the body’s borrowing on a tight leash. For 2024-25, as much as 15% of the main central government capex, or ₹1.68 trillion, is allocated toward funding NHAI.
Central government investment in roads and highways has also undergone another parallel shift in recent years, with a substantial amount of investment in roads and highways now being done outside the ambit of NHAI altogether. For 2024-25, the budgeted amount for spending on roads and highways, above and beyond what NHAI gets, is targeted at ₹1.03 trillion (up from a third of that amount a few years earlier).
The NHAI is, and was, a government body. Any borrowing it does is effectively done with the full backing of the creditworthiness of the government of India. So, in purely economic terms, there is little effect. But the routing of all NHAI funding through the government budget has effectively resulted in spending on infrastructure assets that would have happened anyway being brought ‘on-budget’.
It’s a similar story for the railways as well. As of 2019-20, the central government budget contributed less than half of railways capex for the year ( ₹1.46 trillion). This ratio started to creep up. As of 2024-25, almost all the capex for the railways ( ₹2.52 trillion) will come directly from the central government budget, with just ₹10,000 crore earmarked to be raised by the railways directly from the bond market or its internal resources.
In this sense, at least a significant part of the increase in capex is a shifting of funds—bringing them ‘on-budget’—rather than extra spending. Bringing spending on-budget is not inherently a ‘good’ or ‘bad’ thing, but it does imply that the dramatic increase in central government capex in recent years is less than what meets the eye.
And while PSE capex from internal resources and borrowing has increased in absolute terms, even if we exclude NHAI altogether, it now stands at around 0.5% of GDP. But this is down from almost 2% in 2016-17.
“Even as central capex has picked up impressively in recent years, a broader measure of public capex remains flat because this increase has been offset by slowing PSU capex…," pointed out Sajjid Z. Chinoy, then chief economist at JP Morgan, in an article in The Economic and Political Weekly, in April 2023.
State Push
The good news with capex of state governments is that it too, collectively, has shown an upward trend—from 3.2% of GDP in 2011-12 to around 4.4% of GDP in 2022-23 (budgeted). There are two drivers behind this capex push in recent years at the state level. The first is that tax revenues in the last few years have been buoyant overall. Further, states have received compensation from the centre for losses in revenue when shifting to the goods and services tax (GST) regime.
“Strong growth in tax and non-tax revenues and the advancement of payment by the Centre for tax devolution and GST compensation provided the necessary fiscal space to accelerate capital outlay," stated a Reserve Bank of India (RBI) report on state finances last year.
The other big reason is a ‘special assistance’ scheme under which 50-year interest-free loans are extended by the Centre to states for capital investment. Budgeted at ₹1.3 trillion for 2024-25 (the amount was around ₹1.03 trillion for 2023-24), this has now ballooned to a substantial push toward capex at the state level, provided states meet eligibility criteria for the money to be distributed by the centre. Crisil forecasts that 2023-24 will also see the capital outlay of states (capex excluding loans and advances made by them) rise by 18-20%. “The increase in spending will be supported by healthy goods and services tax collection, stable and upfront devolution from the central government, and allocation of…interest-free loans to all the states for capital expenditure (capex)," said Crisil.
The government has chosen to keep a tight rein on expenditures by the states under the special assistance scheme for capex. A finance ministry circular for the release of funds in 2022-23 under the scheme makes it clear that states have to get the prior approval of the centre before funding any project under the largest sub-component of the scheme (80% of the total for that year), with projects under the PM Gati Shakti National Master Plan receiving priority, ‘where appropriate’.
Private Hope
The real question is whether the government can sustain this pace of increase into the future. A big bet that the government has made is that its capex push will be the catalyst for the private sector to step in and invest on its own as well. “Expectations for a fresh round of capex by the corporate sector to take the baton from the government and fuel the next leg of growth are mounting. Balance sheets are healthy on the back of high profits, with leverage remaining constant or improving and the return ratio at a multi-year high," RBI pointed out, in its latest assessment of the state of the economy.
What are the uncertainties? Personal consumption growth is expected to grow at 4.4% in 2023-24, the slowest pace since 2002-03, and a sign that the big post-covid ‘bump’ to the economy is receding. And while markets are in a bull phase, a recent Long Story in Mint points out that the bull case—the supposed ‘premiumization’ of the economy, where consumers are supposedly buying more expensive and premium products than in the past—has much less to it than meets the eye, given that a substantial mass of consumers, in both rural and urban areas are still struggling. Rural consumer sentiment remains weak. Given that a sustained rise in capital investment, especially in the private sector is dependent on demand picking up across the broad economy, the next few years will be crucial.
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