Spending lag, capacity issues behind govt's capital expenditure push

To address the lag in government spending caused by the election season and to gain a realistic estimate of capacity issues, the finance ministry has relaxed capital expenditure norms and initiated review meetings, according to two government officials.

This comes after a dip in government consumption expenditure proved to be a drag on Gross Domestic Product (GDP) growth.

The growth slowed to a five-quarter low of 6.7 per cent year-on-year (Y-o-Y) in the April-June quarter.

On September 2, the finance ministry relaxed the rules for big releases above Rs 500 crore for all items of expenditure in the current financial year.

Separately, Finance Minister Nirmala Sitharaman began a review of capital expenditure being undertaken by various ministries, asking them to set quarterly targets and expedite the implementation of their plans.

“The capex has a high multiplier impact on the economic activities besides improving infrastructure. The government has been making advance release of funds to the states also to assist them in stepping up their capex outlays. The current exercise is a continuation of the above-mentioned approach,” a senior official said.

Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday said that the lower-than-expected headline GDP number was likely due to the muted government expenditure.

“More than 90 per cent of GDP expanded at a robust pace and materially above 7 per cent. The headline number, however, came lower against the backdrop of muted government expenditure of both the Centre and the States, perhaps due to the Lok Sabha elections. Excluding government consumption expenditure, GDP growth works out to 7.4 per cent,” he added.

The government’s capex in Q1FY25 stood at Rs 1.8 trillion, nearly 33 per cent lower than the Rs 2.7 trillion during the corresponding period last year.

Experts feel that the latest measures have brought a sense of urgency for ministries to spend money while ensuring that they are being monitored.  

 “The ministry is taking into account the lag in investments due to elections. The review of expenditure being undertaken is an established practice, which would give us better clarity of the ministry’s ability to spend for next year’s Budget,” another government official said.

The government has set a target of Rs 11.1 trillion capital expenditure for FY25.

A seasonality-based projection by QuantEco Research shows that if the government was to give its best every month for the rest of the year, it could even exceed this target.

“If we were to take the average benchmark of the past years then it may be difficult to reach the Rs 11.1 trillion mark. But this is not a normal year. First quarter was impacted due to elections. For some states, elections could be more of a reason to frontload capital expenditure, especially those who are ruled by the same party as the Centre,” said Vivek Kumar, Economist QuantEco Research.

Increased capital expenditure (capex) by the private sector and households lifted growth in capital investment to 7.5 per cent from 6.46 per cent in the preceding quarter, according to the data released by the National Statistical Office.

“Private sector capex is showing a positive sign. The future growth of capital investment is crucial. We had a problem of consumption not growing. Both consumption and investment are taking place now in a gradual manner especially from the private sector,” said Madan Sabnavis, chief economist, Bank of Baroda.