 "India's capex budget: Experts call for multiyear, data-driven plans")
Should the capital expenditure (capex) budget of the central government be more detailed and have multiyear targets? At more than 22 per cent, it is the largest government expenditure, except interest.
Ahead of the interim budget on Thursday we asked experts two interrelated questions:
Should there be a change in the treatment of data, almost like the detailed coordinates used in the discontinued railway budget?
Should the targets for capital budget be multiyear instead of single?
Experts tracking the Indian budget are often not satisfied with the results they get from data and the missing link is that the spending does not have a long-term horizon.
On the second question, experts said it is easy to implement. "This is a good use case of blockchain. If all capital budget projects, spread across multiyear, state wise and department wise are to be tracked, technology is available," said Deep Mukherjee, partner at Boston Consulting Group.
More From This Section
R Gopalan, former secretary of the Department of Economic Affairs in the Union Finance Ministry, said multiyear capital budget targets would make sense. A government department could start work on a project with a given budget in year zero and based on the targets achieved move on to the next year. The government can fix the problem of setting annual disbursement targets by calibrating projects midstream. This is easier to do for hard infrastructure projects. "So there could be project-wise allocations, matched with the amount spent in a year, the actual amount spent and finally the outcomes achieved," he said.
However, economist Rathin Roy, managing director of the London based Overseas Development Institute, is not convinced this was the way to go. Roy is one of the earliest commentators on the need for India to adopt a multiyear budget plan. "All modern budgets, current and capital, are multiyear frameworks. Only India and the US are not because fiscal policy is basically a low credibility pork barrel appropriations exercise by a revenue-constrained apex-level government trying to finesse a hard budget constraint," he said.
But having reached there, Roy argued that a budget should not be an outcome document. "That sort of thing is done in something called a plan – a quaint idea but quite useful in the articulation of a capital expenditure programme – but it requires state capacity that this government does not possess," said Roy. In other words, the government at best should only offer an indicative allocation.
On the same vein Ranen Banerjee, Partner, Economic Advisory and Government Sector Leader, PwC felt a budget requires flexibility. "Hard coding the line items could be detrimental for flexibility. A project that is moving fast should get the resources and not await for supplementary budget approvals".
Gopalan, however, pointed out that railway budgets implemented capex targets and it is unfair to claim that the government cannot do it in its plans.
Over the years, central government departments have gradually moved to a detailed oversight of capex. For Indian Railways, the Finance Ministry has begun a structured set of meetings from this financial year (FY24). This was done because the Railways received the largest percentage of the annual capital budget (Rs 2.4 trillion).
The Finance and Railway ministries met over last summer and their discussions were recorded as memorandum of minutes or MoM. Those MoM were then used to break down into details each investment decision by the Railway board and zones. It runs against what Roy said and is closer in spirit to what Gopalan had argued for.
Sudip Sural, senior executive vice-president and head of industry analytics - HDFC Bank, said the government's efforts to create manufacturing growth enablers has a two-pronged approach: Infrastructure capital expenditure and those made as allocations for production-linked incentive (PLI) schemes. It is difficult to make multiyear calls on such expenditure as "the nature of infra spending evolves year to year," he said. Sural agreed with Roy that broad indicative annual capex plans, whether in the budget or by central government companies, "provide the flexibility needed to take these calls".
Banerjee also argued that there is a peculiar challenge with capital budget. These are for instances making estimates of the O&M expenses of the capital project outlays as those will progressively become committed expenditure for the government. Also annuities.
Praveen Kujal, professor of economics at Middlesex University in the United Kingdom, said capital budgets, especially to encourage research, should be spread over years. "Funds should be set aside for emerging technologies and basic research, both of which spur capital growth," he said, citing the US government's support for the National Science Foundation and Defense Advanced Research Projects Agency.
"You see, government commitment is more credible than private. Hence, indicating commitment to certain capital expenditure should also encourage private investment in these areas," said Kujal.
The bottom line is since large capital projects are multiyear efforts, "it makes sense to tag project wise full cost and subsequently allocate them year wise on planned or expected completion approach. This will add to both enhanced planning and budgeting capability as well as create further transparency," said Mukherjee.