Ministries deliver mixed bag on capex

In Budget 2021, finance minister Nirmala Sitharaman announced a capital expenditure of ₹5.54 lakh crore to kick start the investment cycle, a ₹1.42-lakh-crore increase from Budget 2020. The announcement assumed significance since it came in the backdrop of Covid-19 and the subsequent lockdown. The immediate question was the government’s ability to achieve the expenditure target amid supply chain disruptions and its own dwindling fiscal position due to the pandemic. However, the Centre had al - ready readied an execution strategy — front loading allocations to ministries, which, in turn, would have to implement them with full vigour. It was now up to them to hit the ground running.

Eleven months later, while some have performed very well on the capex front, some others have been extreme laggards. Is Centre's capex strategy delivering?

Spending Boost

Nine months into the financial year, expenditure trends reveal during April-October FY22, spending surpassed the pre-pandemic level of FY20. According to the finance ministry, actual capital expenditure at ₹2,53,270 crore during April-October is 26% higher than ₹2,01,273 crore during the same period in FY20. The figure was ₹1,97,355 crore in FY21.

“Fiscal multiplier for capex is higher than revenue expenditure,” N.R. Bhanumurthy, vice-chancellor, Dr B.R. Ambedkar School of Economics, tells Fortune India, adding, the revised capex estimate for FY22 is likely to be higher than budget estimate. According to a 2019 RBI report, the central capex has a multiplier effect of 3.25.

In a report dated December 2, rating agency Crisil observed that capital expenditure is “progressing at a rapid clip” and “multiplier effect can’t remain far behind”. Additionally, while announcing the outcome of the Monetary Policy Committee [MPC] meeting on December 8, Reserve Bank of India [RBI] governor Shaktikanta Das had said the government’s focus on capex should crowd in private investment, which has remained in a prolonged state of muted activity.

“Two trends stand out. One, both Central and state capex have crossed their pre-pandemic levels faster than GDP. And two, while the Centre’s capex has crossed the pre-pandemic trend line, state capex, too, is likely to achieve this feat if budgetary targets are met,” according to the Crisil report.

The impact is visible on the economy. According to data released by the Central Statistical Organisation on November 30, gross fixed capital formation in the economy — an indicator of investment in assets — rose to ₹11,42,907 crore in Q2 FY22, up marginally from ₹11,25,882 crore in the pre-pandemic period of Q2 FY20.

The Report Card

A look at ministries throws up a mixed review. The road transport and highways ministry is the biggest spender on the capex front. Out of the total allocation of ₹1,08,230 crore for FY22, it has spent 69%, or ₹73,797.95 crore, during April-October, significantly higher than 58%, or ₹47,690 crore, in April-October FY21, out of the total ₹81,974 crore allocated for the year.

After roads, it is railways, which has spent ₹60,434.31 crore [58%] during the first seven months of FY22 against an allocation of ₹1,07,100 crore for the entire year. The two ministries [roads and railways] stand out in implementation since they are focused on delivery, says Raj Kumar, chairman and MD, Rodic Consultants Pvt. Ltd., an infrastructure consultancy firm.

In an year hit by Covid 2.0, the Centre provided more on the revenue expenditure side in the healthcare sector, given the urgent consumption needs in terms of vaccination drives and funding of covid care, among others. Of the total revenue expenditure allocation of ₹68,760 crore for FY22, the ministry utilised 54% till October this year.

The spending story has its share of laggards as well. The Department of Telecommunications [DoT] has achieved only 12%, or ₹3,158 crore, of its target of ₹25,933.56 crore during April-October. The power ministry, too, has so far spent only 7%, or ₹109 crore, of the allocated ₹1,564.97 crore.

Central public sector enterprises (CPSEs) under the Ministry of Power have, however, performed better on capital expenditure. Power CPSEs invested ₹32,137 crore on the capital account during April-November FY22, 63% of the annual target of ₹50,690.52 crore. “During FY21, power sector CPSEs incurred a capex of ₹22,127 crore till November which was 49.3% of the total expenditure for that financial year,” the power ministry said.

Centre vs States

Seven states, including Chhattisgarh, Kerala, Madhya Pradesh, Meghalaya, Punjab, Rajasthan and Telangana, have achieved their capital expenditure targets for Q2 FY22. As an incentive, the Centre has allowed them to borrow an additional ₹16,691 crore in line with their eligibility criteria.

“In H1 (April-September), capex rose 78% year-on-year in 16 major states analysed by the agency. These states spent 29% of their budget estimates in H1. While this might seem low, states tend to spend most of their capex budgets towards the end of the year,” according to the Crisil report.

Route to Revival?

The health crisis originating with the first phase of the pandemic in March led to a 24.2% contraction in the country's GDP in the first quarter of FY21, compared with a year ago. The size of the economy tanked to ₹26.90 lakh crore in April-June FY21, from ₹35.35 lakh crore in the same period in FY20.

Both the Central government and the RBI swung into action with fiscal and monetary policy tools to salvage the economy from the impact of the pandemic. By May 2020 the Centre announced the ₹20-lakh-crore Atmanirbhar Bharat package, while the RBI doled out liquidity worth almost half the stimulus to stabilise the financial markets in the aftermath of the pandemic.

The measures taken till then helped the economy and the financial system stay afloat in the wake of the challenge posed by the pandemic. However, as Budget 2021 approached, the challenge was to put the economy back on the growth path. The onus of kick-starting the investment cycle largely remained with the government, with muted exports and risk aversion from the private sector. “One of the discussions that dominated budget deliberations was handouts versus expenditure on the capital account,” says a top finance ministry official. It was the fiscal multiplier effect that led the ministry choose capital expenditure, he adds.

That formed the basis and the backdrop of the ₹5.54-lakh-crore allocation towards capital expenditure for FY22, up 34.5% from the budget estimate of ₹4.12 lakh crore in FY21. The allocation for FY22 is up 26% over the revised estimate of ₹4.39 lakh crore for FY21. It may also be noted that the allocation under the head, as a percentage of the total expenditure, was at a decade high of close to 16%.

A Word of Caution

Even with such high allocation, the actuals in April-September this year as a percentage of the budget estimate is around 45.7%. It is lower than 47.9% in FY21 and 59.5% in FY20, prompting an immediate review of why ministries such as telecommunication are going so slow on expenditure.

More so, this is happening at a time when when infrastructure push is expected to stoke revival while other engines of the economy remain muted. As Crisil puts it, “Public capex can ignite recovery in an environment where weak demand has kept private sector investments tepid.”