Investments contract in first 4 months of FY18

Increase in Centre's capex offset by declining state capex

An investment revival looks increasingly unlikely in the immediate future. 

The capital goods segment in the Index of Industrial Production (IIP), a proxy for investment demand, has contracted for four straight consecutive months, showed the latest data. Since September last year, it has contracted every month, barring two. 

Of the principal drivers of capital expenditure (capex), only the central government seems to be doing the heavy lifting. 

Central government capex has grown at a robust 33.4 per cent in the first four months of the current financial year (FY18). But this has been offset by a fall in state governments’ capex.  

A Business Standard analysis of 10 state governments’ spending pattern shows that these states, put together, have spent only a mere 19.8 per cent of their capex budget in the first four months of FY18, lower than their spending over the same period last year. 

The combined budgetary allocation for capex of these states is a staggering Rs 2.5 lakh crore in FY18, as opposed to the Centre’s allocation of Rs 3.09 lakh crore. 

“The slowdown in revenue expenditure growth and contraction in capex revealed by the provisional fiscal data (for Q1 FY18) for 12 states released by the Comptroller and Auditor General of India (CAG), is likely to have partly offset the positive impact of the front-loading of the central government’s expenditure in that quarter,” says Aditi Nayar, principal economist, Icra.  

Principal among the laggards are the states of Uttar Pradesh and Punjab.

As against a capital outlay of Rs 53,257 crore, Uttar Pradesh has spent only 6.2 per cent, or Rs 3,293 crore, till July. Similarly, Punjab has spent only 9 per cent of its budgetary allocation. 

Some economists have attributed this pattern to the elections in these states, which would imply that capital spending by these and other states should ramp up in the coming months.

But given the pressures that some of these states face on account of their Ujwal Discom Assurance Yojana (UDAY) obligations as well as their farm loan waivers, it is difficult to say for sure. 

“In order to accommodate spending related to servicing of UDAY bonds, pay revision and farm loan waivers without fiscal slippage, some state governments may resort to curtailing productive capital expenditure,” says Nayar. 

Add to that the possibility of central government capex tapering off over the coming months and the situation doesn’t bode well for an investment revival. 

Economists are concerned. “The government has been the main spender so far which gets reflected in the infrastructure industries growth. But being front-loaded in the first few months, it remains to be seen if the momentum can be sustained,” says Madan Sabnavis, chief economist, CARE Ratings.

“The IIP numbers once again confirm that an investment revival is unlikely in the short run. The government is the only entity that is spending. But there are limits to its spending and its capacity to shore up the investment cycle,” says Suvodeep Rakshit, economist at Kotak Institutional Equities.