Covid-19 impact: Govt capital expenditure declines 41% in September

Result of labour unavailability and high base, say experts

Hit hard on the revenue front by the pandemic-induced economic slowdown, the government put a squeeze on capital expenditure, which declined 39 per cent in the second quarter (Q2).

Experts have now cast doubts over the government’s ability to meet its budgeted target for capex this fiscal year, even though the finance ministry recently announced additional spending of Rs 25,000 crore.

The capex decline in the first half of FY21 was 27 per cent. A backward calculation suggests that capex declined by 41 per cent in September, after a 21 per cent contraction in August. 

Experts say this was because of factors like labour unavailability and a high base effect, apart from the government’s expenditure management measures.

While official numbers for September are yet to be released, a top government official said on Monday that the government had spent 40 per cent of its Budget estimate by September.

Capital expenditure is used for asset creation, such as on infrastructure projects, while revenue expenditure comprises of fixed obligations or ongoing operating expenses, such as salaries and pensions. 

Revenue expenditure was up seven per cent between April and August and touched 42.3 per cent of the budgeted target during this period.

Aditi Nayar, principal economist at ICRA, attributed the decline in capex to unavailability of labour, restrictions arising from the expenditure management measures, and a high base effect.

Since there was a general election last year, capital spending was pushed to Q2, resulting in a high base. Conversely, as there was hardly any capex activity in Q1 last year, there was a 40 per cent growth during Q1 this year.

To address this, the finance ministry on Monday announced additional budget of Rs 25,000 crore for capital expenditure on roads, defence, infrastructure, water supply, urban development, and domestically produced capital equipment. 

However, experts believed that even achieving the Budget Estimate of Rs 4.13 trillion will be tough this year.

Nayar said that there could be savings of about Rs 20,000 crore on capex in FY21, despite the recent announcement. 

“Given the level of expenditure that has been incurred in H1FY21, and the restrictions on spending in the last quarter of each fiscal, I don’t expect the actual capex in FY21 to be Rs 25,000 cr higher than the Budget Estimate, as there is huge headroom already available in the BE. Even if we assume that the entire additional Rs 25,000 crore is spent, we expect a shortfall of at least Rs 20,000 crore from the budgeted levels this fiscal,” said Nayar.

As for revenues, direct tax collections, net of refunds, were down 24 per cent as of October 8 to Rs 3.66 trillion, compared with Rs 4.8 trillion in the corresponding period last year. This was barely 27.7 per cent of the budgeted target of Rs 13.19 trillion for FY21. Gross collections were down 23 per cent to Rs 4.88 trillion and refunds up eight per cent to Rs 1.22 trillion. Goods and services tax (GST) collections were down 25 per cent at Rs 4.54 trillion in the first six months of the current fiscal.

Pronab Sen, former chief statistician of India, said according to his estimate, the Rs 12.5 trillion additional borrowing that the government announced just about covers the losses in revenue — that is tax and non-tax. 

“So, if this is all that they are going to borrow, the only way they can increase capex over Budget is by cutting current expenditure.”