Budget share of capital expenditure highest in decade, aims for investments

Public spending push is expected to help push growth after pandemic slowdown in investments

The government on Monday allocated a higher share of the budget to capital expenditure than it has for over a decade, aiming to help push investments amid a pandemic slowdown.

Around 15.91 per cent of the budget is for capital expenditure: it was 13.55 per cent last year. The calculations are based on budget estimates. Capital expenditure refers to money spent on the creation of assets for future use like roads and buildings for health facilities. Revenue expenditure includes things like interest payments and salaries that the government pays on an ongoing basis.

The share of the budget devoted to the creation of long-term assets or capital expenditure has been on the decline in recent years. It had touched 19.3 per cent in the budget estimates for the financial year 2004-05 (FY05). This declined to 12.15 per cent in FY20. This was the lowest in ten years. It was 12.11 per cent in FY10. The previous high before this year's number was 18.02 per cent in FY08.

Overall capital expenditure has taken a hit because of the pandemic. New projects fell 87.6 per cent to Rs 0.87 trillion for the three months ending December 2020. It was 7.01 trillion in December 2019.

The Reserve Bank of India’s January 2021 Financial Stability Report said a change in trend is possible.

“The corporate sector has also raised substantial funds from financial markets amidst easy financing conditions, which have been mainly used for deleveraging and building up precautionary buffers. As growth impulses take root, the private sector capex cycle should revive as existing capacities get utilised and new capacities are added...Growth in capital expenditure of state governments in October 2020…witnessed a positive growth after eight months of consecutive contraction,” it said.

Government spending is expected to play a role in initiating the capex cycle, according to a January 17, 2021 report entitled ‘What to Expect from Budget F2022’ from foreign financial services firm Morgan Stanley India Company.

“We believe that the growth mix will be productive, being more capex-driven – initially by public infrastructure spending, and later by an improvement in private capex as demand conditions improve and the funding environment remains supportive,” said the report authored by economists Upasana Chachra and Bani Gambhir, alongwith equity strategist Ridham Desai and equity analyst Sheela Rathi.