Govt cuts capital expenditure by 41% in Oct, Nov despite FM nudge

May impact growth in Q3 but capex by select states likely to come to some aid

The Centre’s capital expenditure (capex) declined for the second consecutive month in November, when it fell by more than half, year-on-year (YoY). It was down 24.11 per cent in October.

This comes despite Finance Minister Nirmala Sitharaman nudging ministries and departments to spend more on this front. It may affect economic growth in the third quarter of the current fiscal year. However, a bit of support may come from some states, which saw a rise in capex due to expeditious transfer by the Centre.

The Centre spent Rs 20,360 crore as capex in November this year against Rs 43,803 crore a year ago. In October this year, it incurred Rs 23,919 crore against Rs 31,519 crore in the same month of the previous year, according to figures released by the Controller General of Accounts.

The government cut down its capex by 41.21 per cent at Rs 44,279 crore in the first two months of the third quarter of FY22 against Rs 75.322 crore spent during the corresponding period of the previous year.

Till September, the government had spent 38.29 per cent higher capex at Rs 2.29 trillion. In fact, the government’s combined capex for October and November was lower than the Rs 57,483 crore spent in September.

ICRA chief economist Aditi Nayar said, “This does not augur well for the pace and quality of GDP growth in Q3.”

Bank of Baroda chief economist Madan Sabnavis said lower Centre’s spending will affect growth with lag for sure. “But the government has asked departments to spend in October, and hence, they will recoup investments by Q4. Growth impact will be deferred. I don’t think there is a conscious effort to cut capex to control the fiscal deficit though the latter has affected decisions,” he said.

With revenue growth being good, there will be no cut back, according to Sabnavis. He said private sector investments are still lagging and taking place in a few sectors only.

Sitharaman has been reviewing capex by various ministries and departments and asking them to step it up.

Last month, she had pulled up infrastructure ministries for their “sluggish performance” on capex and asked them to step up productive spending to perk up the economy.

Nayar felt that expedited transfers appear to have pushed up capex growth in select states, which may provide some support to GDP growth in the just-concluded quarter.

The Centre had released two instalments of tax devolution to the states amounting to Rs 95,082 crore in November against the normal devolution of Rs 47,541 crore to help them spend more on capex. This would be adjusted against their instalment in March.

Five industrial states — Maharashtra, Tamil Nadu, West Bengal, Uttar Pradesh and Karnataka — saw their capex grow by almost 40 per cent in November, YoY. If Gujarat and Andhra Pradesh are also added to the list (their capex data is not available for November), the combined capex of seven states grew 46 per cent in October, according to figures released by the Comptroller and Auditor General of India (cag).

Till September, their capex rose by 75.31 per cent. Hence, there was also some slowdown in growth in October and November. This could partly be due to contraction of capex by 22 per cent in Maharashtra in November and by 27 per cent in Andhra Pradesh in October.

Last month, the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) had slashed its projections on economic growth for the third and fourth quarters, albeit mildly. This was due to volatility in commodity prices and financial markets, persisting global supply disruptions and Omicron.

However, higher-than-expected GDP growth rate in the second quarter (Q2) prompted the MPC to retain economic growth at 9.5 per cent for FY22.

The committee, in December, pegged economic growth at 6.6 per cent for the third quarter (Q3), down from its earlier projection of 6.8 per cent. It projected 6 per cent for the fourth quarter (Q4) — lower than its earlier forecast of 6.1 per cent.

The economy grew 8.4 per cent in Q2, higher than the MPC’s expectations of 7.9 per cent.