Nurturing capex

With foreign investments declining, it is necessary to maintain growth in government capital expenditure

Last week, the Union government announced several new projects and schemes, whose total cost is estimated at Rs 1.2 trillion. Deploying over 10,000 electric buses across 169 cities in the country, ramping up the Indian Railways’ freight-carrying capacity by executing seven multi-tracking projects covering 35 districts in nine states, expanding the Digital India footprint, and rolling out the Vishwakarma scheme for financial assistance to artisans and craftspeople were the key proposals that received the Union Cabinet’s approval on August 16.

Of course, not all the expenditure on these projects would be an additional burden on the Central exchequer during the current year. This is because a part of the expenditure would have to be borne by the states and only a small portion of the allocated resources would be spent before the end of March 2024. It is possible that a few of the projects may have already been included in the Budget for 2023-24 and, therefore, would not lead to an additional outgo from the Central exchequer.

Nevertheless, these announcements could well be the beginning of a pre-poll exercise by the Centre, aimed at wooing voters in favour of the ruling Bharatiya Janata Party. The additional financial burden on account of what was announced last week could well be manageable. But with several Assembly elections to be held in the next few months leading up to the general elections in May 2024, there is no guarantee that more such projects and popular schemes — such as extending free food grain supplies to all beneficiaries beyond December 2023 or increasing the income support for farmers — would not be announced.

The Union finance ministry, therefore, will be justified in worrying over the way these projects, and possibly a few more schemes on the anvil, could widen the fiscal deficit beyond the projected 5.9 per cent of gross domestic product (GDP) for 2023-24. Remember that the Centre’s gross tax revenue growth in the first quarter of the year slowed down to just 3 per cent against an annual growth target of over 10 per cent (the net tax revenue fared worse, with a decline of 14 per cent). Its disinvestment receipts look set to be much less than what was budgeted at the start of the year, thereby offsetting the benefits that higher public sector dividends and surplus transfer by the Reserve Bank of India (RBI) could yield for the Centre.

And yet, it would be unfortunate if the concern over a widening fiscal deficit were to put brakes on the Centre’s commendable pace of its capital expenditure during the current year so far. Yes, it should keep a check on the overall government spending, particularly its revenue expenditure that in any case was projected to grow by just 1.4 per cent in 2023-24, over Rs 34.52 trillion in 2022-23. But there should be no compromise on the projected capital spending of about Rs 10 trillion during the year. There are three good reasons why fears of a widening fiscal deficit should not deter the finance ministry from fulfilling its capital expenditure target for 2023-24.

One, the Centre has picked up an admirable pace in its capital expenditure so far. In the first quarter, it grew by a whopping 59 per cent, much higher than the annual growth target of 36 per cent. At this pace, the target of Rs 10 trillion of capital expenditure, amounting to over 3 per cent of GDP, looks very much within reach.

Even the states have shown a huge increase in their capital expenditure in the April-June 2023 period by around 74 per cent, supported by the Centre’s 50-year interest-free loan to them for their capital spending. In 2022-23, the Centre had allocated Rs 1 trillion for such assistance to states but succeeded in releasing only Rs 81,200 crore during the full year.

In the first four months of the current financial year, however, the states have already received about Rs 30,000 crore from the Centre out of the total allocation of Rs 1.3 trillion. What’s more, the Centre has approved about Rs 85,000 crore of such support by way of loans for the states’ capital expenditure, or about 65 per cent of the annual allocation.

This healthy pace of investment is a welcome sign of an improvement in the absorptive capacity of government departments at the Centre and the states in implementing capital projects without much delay. The improved pace in the government’s capital expenditure, therefore, must be maintained if the Indian economy is to prevent any setback to its growth engine.

Two, the Union government began to increase its capital expenditure in the wake of the Covid pandemic. In just about three years, the Centre’s capital expenditure is set to go up from Rs 4.26 trillion in 2020-21 to Rs 10 trillion in 2023-24. Such steady growth has had a positive impact by way of crowding in investments by the private corporate sector in the last couple of years.

According to RBI data, private companies had obtained approvals for investment plans for 594 projects at a total cost of Rs 1.17 trillion in 2020-21. This rose to 791 projects with a total cost of Rs 1.96 trillion in 2021-22 and further to 982 projects with a cost of Rs 3.53 trillion in the following year. The 2022-23 investment figures represent the highest level since 2014-15. The rise in private capex has meant that the current year is already seeing a committed investment of Rs 1.72 trillion in the pipeline. It is reasonable to assume that this steady improvement in private sector investments has been helped by a steady increase in the government’s capital expenditure plan. For that reason alone, the government cannot afford to slacken its capital investment pace, now that green shoots of rising private sector investments are becoming visible.

Three, even as domestic investment by Indian companies is on the rise, there is a disconcerting trend in the pace of foreign direct investments into the country. For the first time since 2012-13, gross foreign direct investment in 2022-23 declined by 16 per cent to $71 billion. Worryingly, the declining trend has continued even in the first quarter of 2023-24, when such foreign investments fell by 22 per cent to $18 billion. Foreign equity investments into India in April-June 2023 also fell by a higher margin of 33 per cent. Clearly, adverse global economic conditions have impacted not just India’s exports of both merchandise goods and services, but also its foreign direct investment inflows.

In such a situation, therefore, the need for the government to maintain the tempo of its capital expenditure becomes even more paramount. India’s external sector seems to offer little hope at present with foreign investments and exports faltering. Any step that results in slower domestic investment — either by the private sector or the government — would have many adverse side effects for India’s economic growth. The government should adhere to its fiscal deficit target for the current year, but such a goal must be achieved by reining in its revenue expenditure, not at the cost of any slowdown in its investment plan.