Capex Challenge: 33-35% hike propels economy through government spending; nudges India Inc to invest

Never before has the government of India set aside so much money for infrastructure in a single year. A public capital expenditure of ₹10 lakh crore (about $122 billion) for FY24, as proposed in the Union budget, is mammoth. The outlay is more than the gross domestic product (GDP) of Kenya and almost double the economy of Myanmar.

Earmarking a big capex is rather new to India. Three years ago, in pre-Covid 2019- 20, the Centre’s total capital investment outlay was just ₹3.4 lakh crore — one-third of what is proposed now. For a cash starved ministry like the Railways, for instance, ₹2.4 lakh crore of capex earmarked in the 2023-24 budget is about nine times the outlay in 2013-14.

The dramatic upswing in capex is the result of Finance Minister Nirmala Sitharaman’s experimentation with a formula in three budgets since 2021-22 — hike the capex by 33-35% y-o-y to propel the economy through government spending and to nudge India Inc to invest.

While most economic pundits have given the formula a thumbs-up — enhanced capex usually means better growth potential and job creation — a question mark hangs over the government’s absorptive capacity for such a huge outlay and its ability to crowd in private investments when demand continues to remain lackluster.

Terming the capex enhancement as a wise move, Rajiv Kumar, former vice-chairman of NITI Aayog, tells ET that the government will have to work more on improving its executing capacity. “Railway bureaucracy, for example, will have to be motivated for efficient project delivery,” he says. He pins his hopes on recent initiatives such as Gati Shakti and the national logistics policy, which have accelerated project execution.

Vinayak Chatterjee, infrastructure expert and founder of Gurugram-based The Infravision Foundation, says, “The challenge lies in the conversion of a budgetary outlay into a workable tender for EPC (engineering, procurement and construction) contracts. The bottleneck remains with the political, bureaucratic system in converting a deliverable project into a contract.” He points to the complex labyrinth of processes, including multiple approvals and hurdles in land acquisition. On the utilisation of enhanced capex, Chatterjee is hopeful, as most of the projects — even though they are anchored by the government — will ultimately executed by private companies with a good track record in EPC work.

While the proposed ₹10 lakh crore capital outlay is equivalent to 3.3% of India’s GDP, the effective capex of the Centre for the next fiscal, pegged at ₹13.7 lakh crore, is 4.5% of the GDP. Effective capex includes grants to states for the creation of capital assets.

SUPER INFRA

Though FM has divided the kitty among various ministries, mostly infra ones, capital spending has to be powered by the ministry of road transport and highways (₹2.58 lakh crore) and the ministry of railways (₹2.4 lakh crore). While roadways have always managed to get robust capital support from the finance ministry, the liberal outlay for the railways is a relatively new phenomenon. “We were provided ₹1.37 lakh crore in last year’s budget. But in December we were handed an additional ₹22,000 crore as capital support. We are receiving more and more allocation because we have been able to deploy the money effectively,” says a senior railway officer, who requested anonymity, also countering the criticism that the ministry will struggle to absorb such a huge outlay.

For Indian Railways, this year’s capital allocation is 75% more than last year’s budget estimate (BE) and 50% more than last year’s revised estimate (RE). There is enhanced outlay for the construction of new lines (₹31,850 crore as against RE of ₹24,914 crore in FY23), doubling of lines (₹30,749 crore as against ₹24,092 crore), rolling stock (₹47,510 crore as against ₹23,698 crore) and customer amenities (₹13,355 crore as against ₹3,824 crore), according to budget documents. The railway blueprint also includes rolling out of new Vande Bharat metros connecting short distances as well as experimenting with hydrogen trains which will be deployed initially in hilly areas, according to Railway Minister Ashwini Vaishnaw’s statements while interacting with mediapersons on budget day. Vande Metro, a mini version of Vande Bharat Express trains, is believed to be Railways’ countermeasure to the rapid expansion of regional rails and metros owned by the ministry of urban affairs and select states. The Railways will like to regain its lost turf around big cities.

The ministry of defence (₹1,71,374 crore), ministry of communication (₹63,088 crore), ministry of petroleum and natural gas (₹35,508 crore) and the ministry of housing and urban affairs (₹25,997 crore), among others, will also receive a significant slice of the capital pie.

As FM mentioned in her February 1 budget speech, GoI has prioritised 100 critical transport infrastructure projects for last- and first-mile connectivity in sectors such as ports, coal, steel, fertilisers and food grains. Total investment outlay for this is ₹75,000 crore, which includes a component of ₹15,000 crore from private sources. “These projects will increase the efficiency of the transport supply chain, thereby improving logistics operational parameters such as container turnaround time, dwell time, yard congestion et al,” says an official in the ministry of ports, shipping and waterways.

“For civil aviation, the budget reinvigorates the efforts to build an all-encompassing network of 1,000-plus routes in tier-2 and tier-3 cities,” says Minister of Civil Aviation Jyotiraditya Scindia in a written reply to ET’s queries. “The decision to build an additional 50 airports/ heliports/ aerodromes (from the current target of 100) will go a long way in realising the prime minister’s vision of Ude Desh ka Aam Naagrik,” the minister adds.

If we rank the government’s priorities simply by the size of resource allocation, the transport sector is a clear winner. In the last two years, total allocation for the transport sector jumped from ₹3.32 lakh crore in FY22 to ₹5.17 lakh crore in FY24, registering an increase of 56%. Meanwhile, rural development saw only a 4% increase and agriculture a paltry 0.7% hike. Among other items of expenditure, the allocation for health has marginally increased while that for urban development has fallen.

The government has not concealed its priorities, nor has it been stingy in extending capital outlays to key ministries to keep the growth momentum intact. According to the updated projection of the International Monetary Fund, India will lead the global growth at 6.1% in 2023 and 6.8% in 2024.

Can Sitharaman’s capital push, that too at the cost of new welfare schemes in the run-up to general elections next year, unleash corporate India’s animal spirits?

“While domestic demand has been holding up, external demand is still weak. Unless capacity utilisation goes beyond 85% and there is more certainty on the global and geopolitical fronts, the risktaking ability of the private sector will be constrained,” says Ranen Banerjee, partner — economic advisory services in PwC.

It’s true that private investment often responds to a hike in overall demand comprising consumption and investment expenditure. “Increase in total expenditure of the GoI is budgeted at 7.5% in FY24. This is only marginally higher than the inflation rate implying a very small increase in real terms. This may not stimulate demand much although the structural shift in favour of capital expenditure would help,” says EY India’s Chief Policy Advisor DK Srivastava.

Will private sector investment remain lacklustre throughout the next fiscal? Or, will India Inc with a healthy balance sheet wait for interest rates to moderate? Says Srivastava: “Private investment may respond to a fall in interest rates during the course of the year. The interest rate reduction cycle is expected to start following a fall in the inflation rate.”

Corporate India is waiting for cues to spend more, says Rumki Majumdar, an economist in Deloitte India. “In uncertain times, Keynesian economics suggests that the government has to shoulder the bigger responsibility in investment,” adds Majumdar.

This means, the GoI, which has been doing the heavy lifting so far, will have to stay the course till private companies finally loosen the purse strings.