Capex push by government will continue to stir growth
3 min read . Updated: 01 Feb 2023, 06:41 AM IST
PremiumFinance minister had announced a 35% increase in the capital expenditure target to a record ₹7.5 trillion for the year to 31 March 2023 hoping government spending would ‘crowd in’ investments from the private sector.
NEW DELHI : The government is likely to double down on its capital spending by proposing even higher allocations to build ports, roads and other infrastructure in the Union budget to be presented by finance minister Nirmala Sitharaman in Parliament today.
The budget may also extend the ₹1 trillion interest-free loans extended to states to push up capital expenditure and catalyse economic growth.
The Economic Survey 2022-23 presented in Parliament on Tuesday gave clear pointers toward the need to continue with a capex-led growth strategy, saying this will enable India to keep the ‘growth-interest rate differential’ positive—when the rate of growth is higher than interest rates—and lead to a sustainable debt-to-GDP (gross domestic product) ratio in the medium term.
“The Centre should continue incentivising states for reforms and higher capital spending" to ensure stronger general government finances. the survey said. “The capex-led growth strategy will ensure sustainable debt levels in the medium term."
Sitharaman had announced a 35% increase in the capital expenditure target to a record ₹7.5 trillion for the year to 31 March 2023 hoping government spending would “crowd in" investments from the private sector.
Though the share of private investment has picked up pace, registering growth across sectors in the first half of FY23 as compared to the previous year, the pick-up still remains slow. Global headwinds and the possibility of a recession in FY23 may still keep the momentum under check.
Considering this, it is expected that he Centre would continue with a public capex push raising it again by about 35%, which would take spending to over ₹10 trillion. The outlay (target) for capital expenditure in 2022-23 (BE) was increased sharply by 35.4% from ₹ 5.5 trillion in the previous year (2021-22) to ₹ 7.5 trillion.
Chief economic advisor V. Anantha Nageswaran told Mint, “As a developing country which is aspiring to push up lower middle income category to middle income category, investment in infrastructure upgradation, infrastructure creation will always be there. The right balance has to be brought between public and private sectors depending upon each one’s ability to spend."
“The answer on who should spend varies, depending on the context of the economic cycle. In the last several years, because of the balance sheet considerations in the private sector and banks not lending to more risky borrowers given their own balance sheet problems, the government took up the mantle of continuing with public investments and ramp it up quite significantly in last few years. Whether we should continue with higher public capex or some of the burden should be shared by the private sector is a matter that would be determined by the government," he added.
The government hopes boosting public spending on infrastructure will help create jobs and sustain the economic recovery amid global headwinds. But finding the funds for a massive capital spending programme may still be a challenge as food, fuel and fertilizer subsidies have considerably strained government finances despite buoyant revenue collections. If Sitharaman allocates ₹10 trillion in the budget, the capex estimates for the year starting 1 April may nearly match the previous year’s increase.
Economists said the Centre’s revenue position looks good this year after jumping 34% last fiscal. Moreover, expectations are that revenue may remain buoyant in FY24 too, allowing for an expansionary budget and providing a leg-up to improve the overall investment climate in the country.
While a blueprint for raising public capex is being prepared, the concern is whether the Centre would be able to spend the entire ₹7.5 trillion kept in the budget for this fiscal. According to the Survey, about 67% of the budgeted amount had been spent from April to December 2022. On current trend, it appears that the full year’s capital expenditure budget will be met, the Survey noted.
The steady increase in public capital expenditure has helped support economic growth while laying the foundation for future growth as capital assets boost economic efficiency and potential growth. It could also crowd in private investment, as the IMF observed in the case of India. This is evident from the fact that capacity utilisation in the private sector has been recovering, the survey said.
Going by the Capex multiplier estimated for the country, the economic output of the country is set to increase by at least four times the amount of Capex, the Survey said.
