Centre not driving investment: Capex fell substantially in Q4

Capex fell substantially in March quarter but capital formation in the economy swelled, says the data; none clear on how this happened

The central government’s capital expenditure declined massively but gross fixed capital formation (GFCF) grew about 14 per cent in the fourth quarter (January-March) of 2017-18, giving confusing signals about the sources of investment.

So far, it was widely believed that the government was driving these in the economy. Yet, according to figures issued on Thursday by the Controller General of Accounts, the Centre’s capex contracted 58.4 per cent in the quarter, from the same period a year before. This could well be due to the advancing of expenditure  to the earlier parts of the financial year, due to early presentation of the Union Budget. However, the latter practice was started in 2016-17. 

While government spending in general did increase 16.8 per cent in the fourth quarter, against 6.8 per cent in the third, it was all consumption expenditure, according to the Gross Domestic Product figures.

And, on top of a decline in the Centre’s capex, Aditi Nayar, principal economist at ratings agency ICRA, says 10 state governments also saw a fall in their capex, by 7.1 per cent overall, in the quarter. The story was quite the opposite in Q4 of 2016-17, when the Centre's capex rose substantially but GFCF contracted (see chart).

So, who or what drove these investments? D K Srivastava, chief policy advisor at consultancy EY, points to the government's earlier capex and household investment in fixed assets, particularly in affordable housing. According to a recent report from business chamber Ficci, low-cost housing finance companies, pushed by the demand, have bucked the declining trend in the real estate market. 

The loan books of these companies grew from around Rs 10 billion in March 2013 to a little over Rs 270 billion in December 2017. These facilitated the ownership of around 230,000 homes in this period.

Srivastava also said government capex in the earlier parts of the year was robust and this had an impact in the fourth quarter, too.

However, Anis Chakravarty, chief economist at Deloitte India, said it was the private corporate sector which was behind the investment cycle turning up. They had, he said, put in Rs 500 billion of investment in the past few months — demand, including the external one, has been on an upswing. 

Chakravarty said capex by this sector had increased in both manufacturing and services, except for information technology. In fact, the Index of Industrial Production (IIP) also showed a surge in capital goods production, barring March. It rose by 10 per cent from December 2017 till February 2018. However, it then fell 1.8 per cent in March.