Lacklustre capex by PSUs is blunting government’s growth stimulus

FY25 will be the fourth successive year in which more than half the growth in total spending through the budget will be due to higher spending on capex. (Mint)
FY25 will be the fourth successive year in which more than half the growth in total spending through the budget will be due to higher spending on capex. (Mint)

Summary

The government's growth strategy of increasing capex spending through its budget can at best support the economy by offsetting smaller investments by central public sector enterprises, but not stimulate GDP to a higher trajectory

The Narendra Modi government’s strategy for supporting growth has been to increase capital expenditure through its budget in the hope that the infrastructure created would nudge the non-government sector to invest, creating new incomes.

Presenting the interim budget for FY25 on 1 February, finance minister Nirmala Sitharaman, while keeping all taxes untouched, increased the budget outlay for capex for the fourth straight year. 

The strategy of prioritising capex over other expenditures has been widely praised for it leads to an improvement in the quality of the government’s spending. But is it actually leading to growth?

It’s true the Union Budget’s quality of spending has improved over the years, as it is spending more than earlier on capex, even if its equity infusion into Air India and BSNL are removed from the calculation. 

Calculations by economists at Motilal Oswal show that the equity infusion in Air India made up for more than a third of the capex increases by the budget in FY21 to FY22, and as much as 1.74 trillion went to BSNL from FY21 to FY23.

FY25 will be the fourth successive year in which more than half the growth in the total spending through the budget will be due to higher spending on capex. The interim budget projects that capital spending in FY25 (budget estimate) will increase 17% year-on-year, which is more than double the growth projected in the total spending, 6%. 

The government will spend 11.11 lakh crore (budget estimate) under this head, more than three times of what it was five years ago.  

At 3.4% of GDP, it is double of the Centre’s capex in FY14: 1.7% of GDP. 

But will this capex by the budget contribute more to overall GDP growth than was the case pre-covid or in FY14?  

No, because the budget’s increase in capex is offset by the lower capex by central public sector enterprises (CPSEs). The budget is in effect merely substituting for reduced capex by PSUs. 

The growth impulse and multiplier in the economy depend not just on the central government’s capex spending; but on the total cumulative capex spending by the Centre, states and public sector companies. 

Government data compiled and analysed by Motilal Oswal in its note dated 5 February shows that capex (as measured by Internal and Extra Budgetary Resources) by CPSEs was 2.8% of GDP in FY14. It was 1.4% of GDP in FY23 and 1% of GDP in FY24 (revised estimate). It is budgeted to fall further to 0.9% of GDP in FY25 (budget estimate). This is the lowest in at least the past two decades for which the data is available.

At its peak, CPSEs’ capex was 3.3% of GDP in FY09. The good news, though, is that after contracting for four years, capex by PSUs is slated to grow 2.4% in FY25 (budget estimate). This will be the first year in five years that CPSEs will increase their capex. 

But even after that, the total central public sector capex in FY25 by the Centre and the CPSEs is budgeted (budget estimate) at 3.6% of GDP, same as what it is estimated to be in FY24 (revised estimate), and lower than the pre-covid trend of 4%. In FY14, this was 4.2% of GDP. 

If we include capex by states, the total public sector capex was 5.8% of GDP in FY14. It was 5.7% of GDP in FY23, as per the latest available data. 

In these circumstances, the budget’s growth strategy can at best support the economy by offsetting the smaller investments by CPSEs, but not stimulate GDP to a higher growth trajectory. Probably explains why the private sector remains in wait-and-watch mode and is yet to respond to the Modi government’s call to resume investing.

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

Switch to the Mint app for fast and personalized news - Get App