Investment deficit

Govt should not hold back capital expenditure

The Ministry of Finance has asked other departments and ministries to restrict their expenses within the limits allocated for the current fiscal year. The finance ministry is preparing the Union Budget for the next fiscal year along with the revised estimates for the current year, to be presented on February 1. The government is in a comparatively good position this time because of higher than expected revenue collection. However, a new wave of the pandemic and a sudden increase in the number of infections over the past few weeks have underscored that uncertainty is likely to continue in the next fiscal year as well. Renewed restrictions on public mobility have affected the ongoing recovery. Although the headline growth number will be higher in the current year because of the base effect, the economy would need continued support. Most economists in this context have argued for boosting capital expenditure.

Higher capital expenditure by the government would help generate demand and attract private investment over time, which is essential for sustaining higher growth. However, despite this consensus view, which is also accepted by the government, it is puzzling why it has gone slow on capital expenditure in the current year. While the government budgeted for over a 30 per cent increase in capital expenditure this year, it spent less than 50 per cent of the Budget estimates by the end of November 2021. Further, as a recent report in this newspaper showed, spending even in the government’s focus areas has been slow. For instance, the Department of Economic Affairs was allocated about Rs 56,500 crore, largely meant for the National Infrastructure Pipeline. But only about 2 per cent of the allocation was spent by November end. Similarly, against the allocation of about Rs 60,000 crore for the drinking water programme, less than a third was spent during the same period. Spending by the Department of Telecommunications was also slow.
 

It is possible that the government would cover more ground before the year ends, but that’s not how capital expenditure should be approached. Pushing expenditure towards the end of the year can affect efficiency. It is worth recalling in this context that the presentation of the Union Budget was advanced to avoid such outcomes. The idea was that the early passage of the Budget would enable the government to start spending from the beginning of the fiscal year. Slow movement on capital spending also cannot be explained by the pandemic as the caseload was comparatively low in the second half of 2021. In fact, despite greater pandemic-related uncertainties, the pace of spending compared to the Budget estimates was good during the last fiscal year. Thus, it is not very clear what is holding the government this year, particularly given the revenue position. 

It is likely that higher than expected expenditure in other areas may be affecting the capex Budget. This must be avoided. In a situation where the government is widely expected to boost capital expenditure, not spending the budgeted amount will affect growth prospects. The government would be well advised to cover as much ground as possible before the fiscal year ends. The focus next year should also be on pushing up capital expenditure with the required adjustment in overall spending. The government can also raise resources by aggressively pushing disinvestment.