Adopting Capex For Growth

BUDGET 2022 pushed for economic revival by significantly enhancing the FY23 allocation to capital expenditure. The ministry’s preference for capex over alternatives such as consumption-led growth via demand push or direct fiscal stimulus was decided after a very ‘animated’ pre budget discussion internally as the then principal economic advisor Sanjeev Sanyal put it. The key concern, however, was whether ministries will be able to utilise the allocations, and money will find its way into the economy.

Post budget, Sanyal said the government had done its job and it was now up to the ministries to take the baton of economic revival ahead through public infrastructure. In Budget 2023, too, significant thrust was given to capex, but soon, the Russia-Ukraine war stoked conversations in the corridors of North Block about whether the revised estimates will be reduced. But the government continued its capex binge with the FY24 allocation of ₹10 lakh crore on the back of actual expenditure in FY23 surpassing revised estimate. Led by the ministries of highways and railways, the utilisation of budgetary allocations by ministries has followed the sprint. Actual expenditure between FY21 and FY23 at ₹17.55 lakh crore has, in fact, overshot the cumulative allocation of ₹17.16 lakh crore.

No wonder Prime Minister Narendra Modi has said India is witnessing an “infrastructure revolution”. Whether in expressways, railways, or waterways, the Central government is investing lakhs of crores on infrastructure. And even though the numbers speak for themselves, the big question facing the finance ministry ahead of the upcoming budget is: For how long will the government be able to do the heavy lifting on infrastructure spend? In an election year, what will be the fate of mega allocations to capital expenditure? Though it is specifically in the context of extension of the foodgrains scheme for another five years, ministry officials have expressed confidence that current levels of allocations are sustainable and the government is on track as far as fiscal consolidation roadmap is concerned.

Macro Picture

In the five years between FY18 and FY23, total budgetary allocation to capital expenditure stood at ₹26.63 lakh crore. Of the total allocation, funds worth ₹26.62 lakh crore were utilised. In fact, the Ministry of Road Transport and Highways and the Ministry of Railways have surpassed their budgetary allocations — ₹5.63 lakh crore and ₹4.88 lakh crore — and implemented projects worth ₹6 lakh core and ₹5.49 lakh crore, respectively, between FY18 and FY23. Other ministries such as housing and urban poverty alleviation (₹1.10 lakh crore) and telecom (₹73,653 crore) have seen marginally lower utilisation of allocations in the last five years, but it has picked up in FY24.

The quantum of investments into the economy has boosted the rate of gross fixed capital formation (GFCF), which indicates the generation of productive assets in the economy. According to the Ministry of Statistics, GFCF grew 25% to ₹28.72 lakh crore in H1FY24, compared with ₹22.87 lakh crore in H1FY22. A closer look at capital formation as a percentage of GDP gives a better purview of the impact of the Centre’s capex policy. GFCF as a percentage of GDP in Q2 of the current fiscal stands at 35.3% — up from 27.6% in Q4FY17.

In a report released in October last year, Care Ratings points to the overall increase in GFCF to 34% of GDP in FY23, a level last seen in 2013. “Over the past few years, public capex has remained strong mainly led by the Centre. The government’s commitment to capex is reflected in its budgetary priorities. The share of capex within total expenditure has undergone a substantial increase, from 12.1% in FY21 to 22.2% in the Budget estimate for FY24,” the report says.

Capex Trends

Two key trends emerge from the capital expenditure data during April-October this year. First, even as both highway and railway ministries are the front runners in cumulative utilisation of the allocation over last year, the achievement in terms of percentage of budget estimate (BE) is down. Secondly, other ministries that displayed a slow utilisation of the allocation such as telecom and housing are spending the funds with greater fervour, making up for the lag by the two major ministries. So, against a BE of ₹10 lakh crore, the utilisation till October stands at ₹5.46 lakh crore, 54.7% of budget estimate. The capex utilisation level in the previous fiscal till October was 54.6%.

“The current level of capital expenditure is highly sustainable. We will meet the fiscal and current deficit target for FY24. We expect government agencies to utilise the funds allocated to them,” says T.V. Somanathan, finance secretary.

The Ministry of Road Transport and Highways has spent ₹1.71 lakh crore till October, or 67% of the total allocation of ₹2.58 lakh crore, for the current fiscal, against ₹1.46 lakh crore, or 78% of the FY23 budget estimate of ₹1.87 lakh crore a year ago. So, while absolute numbers are higher than last year, the performace vis-a-vis BE is subdued owing to the big-ticket size allocation. The same trend is visible in capex utilisation by the Ministry of Railways, which has spent ₹1.56 lakh crore till October this year, 65% of the budgeted ₹2.40 lakh crore for the ongoing fiscal. The ministry had spent ₹1.02 lakh crore, or 75% of the budget estimate of ₹1.37 lakh crore, during the first six months of FY23.

Others such as telecom, housing and urban poverty alleviation have picked up pace in meeting budgeted targets for the fiscal. At ₹40,468 crore till October, the telecom ministry has utilised 66% of the budgetary allocation, compared with 46% a year ago. The Ministry of Housing and Urban Poverty Alleviation has utilised ₹12,225 crore, against ₹10,499 crore spent till October last year.

Eye On States, Private Sector

Even though more and more ministries are actively participating in capital spending, compared with the heavy lifting done by the highways and railways earlier, states and private sector capital expenditure have started picking up.

According to the Care Ratings report, as on August 31, the collective utilisation of the budgeted capex by 19 major states rose to 25%, against 20% during the same period in FY23. “Notably, Andhra Pradesh (51%), Telangana (49%) and Madhya Pradesh (42%) maintain robust capex utilisation rates. Conversely, Maharashtra (15%), Karnataka (12%), and Punjab (12%) continue to display a low utilisation rate,” the report says.

After the announcement of Q1FY24 GDP numbers, chief economic advisor V. Anantha Nageswaran had said indications of private sector capital investments had started getting visible. A study of financial statements of 1,299 non-financial companies by Care Ratings indicates that all the companies witnessed a strong capex YoY growth of 36.5% during FY23, up from 22.6% a year ago. “The aggregate capex undertaken by Indian non-financial firms in 2023 surpassed pre-pandemic levels for the first time, with 3.3% above the pre-pandemic baseline of 2019,” says the agency, adding, the top five sectors in which capex was concentrated were crude oil, power, telecom, iron and steel and retail. Capacity utilisation above 75% and public investments crowding in private investments are expected to benefit the Centre’s capital formation initiative, going ahead.

Political Puzzle

It remains to be seen, however, whether there will be a status quo on capex or a directional change, given the crucial Lok Sabha elections next year. In November end, the Union Cabinet cleared the extension of the Pradhan Mantri Garib Kalyan Anna Yojna (PMGKAY) for five years beginning January 2024. It will provide free foodgrains to 81.35 crore people under the National Food Security Act, leading to a subsidy outgo of ₹11.8 lakh crore. PM Modi announced the extension of the scheme, scheduled to end in December this year, in the build-up to the assembly elections in Rajasthan, Madhya Pradesh, Chhattisgarh, Telangana and Mizoram.

The finance ministry’s view is that the upcoming general election is not a snap poll. The ministry has expressed confidence that the extension of the PMGKAY will not throw the fiscal calculation off the grid. It is sticking to its fiscal deficit roadmap of 5.9% of GDP, which means the fate of capex initiatives will be known only on February 1, when the interim budget is tabled.