Pace of govt capital expenditure not robust enough, feel policymakers

For a number of reasons, including the pandemic and global macroeconomic factors, the pace of government capital expenditure is not as robust lately as policymakers would have liked. 

This is borne out by the available data and confirmed by officials.

Since the Covid-19 pandemic flatlined the Indian economy in April-June 2020, the Centre has made public investment in infrastructure the main plank for economic recovery. 

The years FY21, FY22 and targets for FY23 have seen substantial jump in the Centre’s capex outlay. The foundation of this capex push is the Rs 111 trillion National Infrastructure Pipeline (NIP).

“The focus on infrastructure is here to stay. However, there are some issues with absorptive capacity the further you go into the value chain,” a senior government official told Business Standard.

The official added that while funds for infrastructure projects are being allocated by the Centre expeditiously, the entities implementing these projects have not quickened the pace yet.

“This is a temporary problem. It is the states, local bodies and private contractors that implement most of these projects and they are not able to spend as fast. So, there is a lag. But absorptive capacity is also being ramped up gradually,” the official said.

The official added that suppliers of raw materials, building and construction equipment are also expanding their capacities to meet the demand.

According to GDP’s second advance estimate data, released by the National Statistical Office (NSO), nominal gross fixed capital formation (GFCF) for FY22 is expected to be Rs 66.98 trillion. 

This is about Rs 1.8 trillion lower than the figure projected in the first advance estimates. 

GFCF’s share of GDP is projected at 28.3 per cent in second advance estimates compared with 29.6 per cent in the first advance estimates. 

If one excludes inflation adjustment, GFCF for FY22 is now expected to be Rs 1.19 trillion lower than the number projected in the first estimates.

The second advance estimates take into account the Omicron wave and the localised restrictions that came with it. And indeed, the two Covid waves that occurred in the current fiscal, did impact implementation of projects.

GDP data for the October-December quarter (Q3) brings up some interesting numbers. GFCF for Q3 was slightly lower than Q2 in absolute terms. 

However, as a percentage contributor to nominal GDP, it was at 26.1 per cent, lower than 29.3 per cent in Q2 and 28 per cent in Q1.

GFCF has been taken as a proxy here because most of the capital formation is because of Centre and states’ capex plans. And, nominal GDP has been taken because inflation has been a major factor in FY22.

For the current January-March quarter as well, the pace of capital expenditure is unlikely to be ramped up.

“The government has significantly ramped up capital expenditure since the onset of the pandemic. However, the fruits of such enlarged expenditure may take a while to fructify as private investment is just showing signs of a pick up. Additionally, state governments also have to partner the central government to reap the benefit of such spending,” said Soumya Kanti Ghosh, chief economic advisor, State Bank of India.

“However, the current war could upset all such endeavours as the potential loss from LIC disinvestment — that might be pushed into next year — may have to be offset by an expenditure compression that is elastic in nature. In this case, the burden might fall on capital expenditure,” Ghosh said.