Interim Budget: Share of capex allocation jumps to 30-year high in FY25

The headline figure of Rs 11.1 trn is 11.1% higher than FY24, says Finance Minister

Union Finance Minister Nirmala Sitharaman, in her Interim Budget, raised the Centre’s capital expenditure (capex) target by 16.9 per cent for financial year 2024-25 (FY25) to Rs 11.1 trillion over the Revised Estimates (RE) for FY24. With this, the government is continuing with the push for public investment-led growth amid worsening global headwinds.

Though this may come across as a slowing of the pace of capex growth witnessed post-pandemic, especially compared to the 28.4 per cent increase in FY24, the share of capex as a percentage of total expenditure is set to touch 23.3 per cent in FY25 – the highest since the 1994-95 Budget, shows data from the Centre for Monitoring Indian Economy (CMIE) and Budget documents.

 

However, the government reduced capex by Rs 50,715 crore to Rs 9.5 trillion in the FY24 revised estimates compared to the budget estimates for the year. 

Some experts believe the Centre is unlikely to achieve the revised target for FY24 as the government has spent only Rs 6.7 trillion till December, shows latest data from the Controller General of Accounts. This would mean the government needs to spend Rs 2.76 trillion of capex in the March quarter, which amounts to 29 per cent of the revised estimates target.

“The capex to GDP ratio is budgeted to increase to 3.4 per cent in FY25 as against less than 2 per cent in the years before the pandemic. There continues to be a large focus on roads and railways, as per the Budget allocation,” said Rajani Sinha, chief economist at CareEdge Ratings. “Despite being an election year, the government's continued commitment to productive capital expenditure, even at the expense of revenue expenditure, is a welcome move.” 

Roads and railways, defence and interest-free capex loans to states are key items for capital expenditure in FY25.

The Budget kept the 50-year, interest-free loans to states unchanged at Rs 1.3 trillion in FY25. The scheme was launched in FY23 with an allocation of Rs 1 trillion to spur investment in infrastructure and incentivise states to take complementary policy actions.

The finance minister, in her Budget speech, said a provision of Rs 75,000 crore as 50-year interest-free loan is proposed for FY25 to support milestone-linked reforms by the state governments. “Many growth and development enabling reforms are needed in the states for realising the vision of ‘Viksit Bharat’,” she added. However, Finance Secretary TV Somanathan later clarified in the customary post-Budget press conference that the Rs 75,000 crore will be part of the Rs 1.3 trillion interest-free capex assistance promised to states.

Amar Ambani, executive director at YES Securities, said the government’s infra push continues unabated, albeit at a slower pace versus market expectation. “Granting sustained interest-free loans to states and urging them to spend on capex will have a bigger multiplier effect on growth,” he added.

The Centre’s effective capital expenditure, which refers to the sum of capital expenditure and grants-in-aid for the creation of capital assets, is set to increase 17.7 per cent to Rs 15 trillion including Rs 3.9 trillion grants in aid.

“At an aggregate level, higher multiplier of capex versus revenue expenditure bode well for the enhancement of the economy’s capital stock and productive capacity, as well as for improving the overall quality of the expenditure mix,” Radhika Rao, senior economist at DBS, said.

Increased government spending is likely to help draw private investment, according to a January 15 Asia Economics report from global financial major Morgan Stanley authored by chief Asia economist Chetan Ahya, Asia economist Derrick Y Kam, and economists Qiusha Peng and Jonathan Cheung.   

Jagannarayan Padmanabhan, senior director at Crisil Market Intelligence and Analytics, said roads and railways continue to garner a lion’s share of the proposed expenditure this year. 

“The government has also indirectly signalled the need for greater private sector participation to support growth in these core sectors,” he said. “That could mean asset monetisation could gather pace in the coming months.”