Govt targets higher capex in upcoming Budget amid fiscal gains and optimism

The Union Budget is set to project higher capex, surpassing the Rs 11.1 trillion outlined in the Interim Budget, reflecting India's improved fiscal discipline and global investment prospects

Having earned plaudits for the fiscal scorecard, the top decision-makers in the government are determined to do an encore with the capex numbers. The Union Budget to be tabled in Parliament on 23 July will see a far higher spend projected for capital expenditure than the Rs 11.1 trillion projected in the interim Budget on February 1. 

India’s fiscal math was something like a good behaviour certificate. A good scorecard meant little except the political headache of not meeting expectations of higher subsidies in the short-term period, usually three years or more. As elections approached, the certificate lost its relevance, failing to boost polling percentages.

But things have changed. Fiscal discipline has started paying off for India. It has led to the inclusion of Indian debt papers in at least one of the global bond indices, promising an inflow of over $20 billion of foreign money within the financial year FY25. There is more positive news to come. S&P has not only changed the outlook for India to positive, but it has also reiterated that an upgrade is just round the corner. “The positive outlook reflects our view that we could upgrade Union Bank over the next 12-24 months if we raise the sovereign rating on India” the world’s largest rating agency has said as recently as June 21, assessing the rating of state-owned Union Bank of India. 

For the government, squandering this fiscal gain is not an option. This will, however, not limit the capital expenditure, according to a top government source. The Finance Ministry and other related departments of the government are in their customary lockdown now, till the Budget is placed in Parliament by Finance Minister Nirmala Sitharaman. 

Higher capex — how high?

The rapidly rising capital expenditure is already at 23.3 per cent of the government expenditure according to Interim Budget figures. Research wings of rating agencies do not expect this ratio to improve. ICRA believes the government will likely retain its capex target of Rs 11.1 trillion for FY2025. Its estimate is well-judged. Against a 17.1 per cent growth rate target, with Rs 11.1 trillion capex pencilled in for FY2025, the Centre has undertaken a lower 14.4 per cent spending on the two months of April and May, a “volatile monthly trend”. 

A government official explained that a higher capex was comfortable since the demand from Andhra Pradesh could be largely subsumed in it. Chief Minister of the state N Chandrababu Naidu met Prime Minister Narendra Modi, Home Minister Amit Shah and BJP Chief JP Nadda last week to discuss his proposals for the state. Naidu wants financial support from the centre to go ahead with the largely unfinished development of Amaravati, the state capital and several irrigation projects. 

“The advantage of these projects is they will be moved fast by the state government,” said the government official. The Finance Ministry is confident that the sluggish run rate of capex in April and May could be corrected soon and exceeded in the current financial year. 

With this assurance, while the Interim Budget had projected Rs 70,000 crore for ‘new schemes’ in the capital expenditure for FY25, this number could be doubled. This will have several benefits. First, a higher number will push up the share of capex in the government budget and also ensure that the capital expenditure to GDP ratio, at present 3.4 per cent, will also be raised. The government’s capex allocation has more than doubled from Rs 4.39 trillion in FY21, to Rs 11.11 trillion as per the interim budget numbers.

State assistance and PLI expansion

This sum could be different from the provision of Rs 1.30 trillion within the capex for assistance to states. That purse titled ‘Special Assistance to States for Capital Investment 2023-24’ was announced in the Union Budget FY24. Under the scheme, assistance is provided to the states in the form of a 50-year interest-free loan. While Rs 1 trillion is shared among the states in proportion to their award of taxes from the Finance Commission, the rest is linked to projects like reforms in the power sector, through the construction of Unity Mall in each state to promote ‘One District, One Product’, building rural libraries and so on. But those cannot be differentiated among the states. The Andhra package will be directed only to it.

The other bump up in capex could come from expansion of the scope of the Production Linked Incentive (PLI) scheme, which is now spread among 13 manufacturing sectors. Since the government is still to see a significant jump in private sector investment, it feels the PLI schemes have the potential to act as accelerators for those as well as to pull in high-quality job creation, said Rahul Garg, CEO & Founder-Moglix. An SBI research report also bats for a separate PLI scheme for MSMEs to boost the sectoral contribution further and facilitate employment generation with representation from across textile, garments, handicraft, food processing, leather, electronics, auto components and bulk drugs.

For Prime Minister Narendra Modi, it will be politically difficult to show a flat capex, even after factoring in the slowdown caused in the first quarter by the election imperatives. While there are competing demands from each sector for tax relief and revenue expenditure to shore up immediate consumption, a slack in capital budget will not be read well by the investors, domestic and foreign.

Worry point

A 14.4% decline in capex, to Rs 1.4 trillion during April-May 2024 (12.9% of FY2025 BE) from Rs 1.7 trillion during April-May 2023 (17.7% of FY24 prov), with the monthly capex halving to Rs 443.9 billion in May 2024 from Rs 893.3 billion in May 2023 (Rs 992.4 billion in April 2024)

[Source: ICRA note]