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While reallocating capital, policymakers need to factor in project timelines, their utility as well as political expediency.
While reallocating capital, policymakers need to factor in project timelines, their utility as well as political expediency.

Govt faces a tough balancing act on capex amid virus crisis

  • The Centre may opt for cuts in capital expenditure or reallocate spending based on priority
  • Managing two seemingly opposing responses of public investment is complex, says IMF

NEW DELHI : While a severe resource crunch has forced the government to limit the fiscal stimulus package to less than 1.5% of India’s gross domestic product (GDP), it may now have to cut its capital expenditure to make room for emergency spending to tackle the coronavirus pandemic.

In fact, the discretionary nature of public investments has led successive Indian governments to cut back on capital expenditure to contain fiscal slippages, primarily because it is difficult to prune revenue expenses comprising salaries, pensions and state transfers. However, considering that public investment in infrastructure projects create jobs and have a multiplier effect on economic activities, the Centre may have to put its priorities right and balance it out.

In an 11 May note on how countries facing financial stress can better manage their public investments during the covid-19-led crisis, the International Monetary Fund (IMF) said managing the two seemingly opposing responses of public investment is complex and requires careful consideration.

“Creating fiscal space through cuts in public investment must be judiciously designed to avoid an excessively negative impact on the economy, employment and future costs. There may also be legal and contractual impediments to reallocating funds from capital to current spending, and to cancelling or postponing projects," said IMF economists Eivind Tandberg and Richard Allen in a special series on covid-19, titled Managing Public Investment Spending during the Crisis.

Mint reported on 4 May that the Union government was planning to slash this year’s budgeted capital expenditure of 4.1 trillion to finance covid-19-related requirements, in an effort to cap the fiscal deficit amid shrinking revenues. In an interview on 19 May, expenditure secretary T.V. Somanathan said the government will opt for expenditure switching from low-priority to high-priority in FY21.

The IMF said as the covid-19 pandemic unfolds, adjustments in public investment should focus on their efficiency, equity and effectiveness.

“Cuts should target investment projects with lower benefits (economic and social) compared to costs. The costs and benefits of the whole portfolio should be reassessed, including discontinued pre-crisis projects," it said.

If cuts in investment spending are unavoidable, they should be based on a transparent criteria and minimize the negative impact on long-term growth. “In some cases, it may be politically opportune to retain a new, politically visible investment project, while at the same time cancelling other projects that are close to completion. Alternatively, more projects may be kept alive that are financially sustainable, and payments stretched over a longer period. Such decisions reduce the net benefits of the investment portfolio."

A case in point is the redevelopment of the Central Vista project to build a new Parliament house, a new central secretariat complex for ministries, and residences for the prime minister and vice president. The environment ministry had given its green signal for the project and the central government has notified the land-use change.

N.R. Bhanumurthy, professor, National Institute of Public Finance and Policy, said the government should postpone some new projects it sanctioned in the budget and advance some other projects it thought would be completed by next year by allocating more resources.

“The new projects will take four or five years to complete. The government should not put a single pie in projects like the Central Vista," he added.

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