Budget 2021: Govt may raise capex outlay to revive demand and boost growth

Analysts say it could be 10% more than allocation for FY21

Capital spending will remain a key focus area for the government in the upcoming Budget to revive demand and boost growth as the economy grapples with recession.
 

Improved revenue collection, coupled with rationalisation of central schemes and centrally sponsored schemes, will make way for higher outlay towards infrastructure and asset creation in 2021-22, in a bid to spur job creation.
 

After the first half of 2020-21 saw a 27 per cent decline in capital expenditure, Finance Minister Nirmala Sitharaman reiterated the government’s resolve to increase spending without worrying about the fiscal deficit.
 

In line with that commitment, capital expenditure grew 130 per cent in October and 249 per cent in November year-on-year (YoY). Growth in the first eight months stood at 13 per cent, compared with a 2 per cent expansion up to October. Capex has a multiplier effect on economic growth and development.
 

“Capex will be one of the three board focus areas of the upcoming Budget. There have been specific announcements made by the government in the recent stimulus packages with a focus on capital expenditure. Spending on infrastructure activities could see a perceptible increase as the spending towards capex has multiplier effects and supports more employment,” said a note by CARE Ratings.
 

Revenue expenditure, on the other hand, comprises of fixed obligations or ongoing operating expenses such as salaries and pensions, which grew by 3.6 per cent in the April to November period.

 

Despite a steep fall in tax revenue, the finance ministry allocated an additional Rs 25,000 crore for capex on roads, defence, infrastructure, water supply, urban development, and domestically-produced capital equipment in October. This was in addition to the Rs 4.13 trillion allocated in last year’s Budget.
 

In the April to November period, four segments — defence (30 per cent), roads (22 per cent), railways (16 per cent), and food and public distribution (5 per cent) — accounted for 73 per cent of total capex. Though apprehensive initially, economists are now confident of the government achieving the Budget target.
 

“Looking at the third quarter, the government will most likely be able to utilise the capex allocation in the current fiscal,” said Madan Sabnavis, chief economist, CARE Ratings. He added that the capex allocation in the upcoming Budget may be about 10 per cent higher than the Rs 4.38 trillion of FY21, if not more, as the government will also need to look at narrowing the fiscal deficit.
 

The fiscal deficit had exceeded the Budget target already by July as the nationwide lockdown was in force during the first quarter. Economists estimate the gap to widen to anywhere between 7 per cent and 9 per cent of the gross domestic product (GDP) as against the earlier estimate of 3.5 per cent.
 

Aditi Nayar, principal economist, ICRA Ratings, said normalisation in economic activity in FY22 would support a healthy rise in tax collections, allowing enough space for prioritising capital expenditure, health spend and vaccine roll-out. Nayar has estimated a fiscal deficit of around 5 per cent of GDP in FY22, which could either be set as a point estimate or a relatively narrow range around that point.
 

The Centre also provided a Rs 12,000 crore interest-free 50-year loan to states to be spent entirely on new or ongoing capital projects. States can settle bills of contractors and suppliers, but all amounts have to be paid before March 31. Of the Rs 12,000 crore, Rs 1,600 crore will be given to north-eastern states and Rs 900 crore to Uttarakhand and Himachal Pradesh.
 

While Rs 7,500 crore will be disbursed to other states, Rs 2,000 crore will be given to states that undertake specified reforms.

However, economists feel this may not be sufficient and may impact states’ capital spending in the current fiscal, and this might impact economic growth in the fourth quarter. “The aggregate debt of 12 major states is estimated to deteriorate to 28.9 per cent of gross state domestic product in 2020-21, from 22.3 in the previous fiscal and 21.9 per cent in FY19, and, hence, [states] may have to undertake an aggregate cut of Rs 2.5-2.7 trillion in their budgeted capital spending in FY21 on account of a ‘sharp revenue shock’,” ICRA had said in its note.
 

Although the economy saw a surprise pick up in the second quarter, it entered into a recession with a 7.5 per cent contraction in Q2 after an unprecedented 23.4 per cent decline seen in Q1.