An opportunity in capex decline: Scrap new schemes, BSNL equity infusion

The Union government’s capital expenditure (capex) continues to be a cause for concern. Of course, the extent of its decline has reduced somewhat — from 35 per cent at the end of the first quarter of the current financial year to 15 per cent at the end of six months. But the latest number for the April-November 2024-25 period shows that the Union government’s capex was still 12 per cent lower than what it was in the same period of 2023-24. Instead of aiming for the targeted 17 per cent growth to Rs 11.11 trillion in capex for 2024-25, the government will have to strive hard to at least cross the figure of Rs 9.48 trillion reached last year.

 

What has led to this decline? A widely held view is that the seven-phase general elections, which began on April 19 and ended on June 1 last year, caused a slowdown in capex. But if that indeed is the reason, the decline in capex in the first quarter should have been reversed in the second quarter of 2024-25. And certainly, the first two months of the third quarter should have raised the trajectory of capex growth to a higher level. There has been some improvement, but a 12 per cent decline in the April-November 2024-25 period is no comfort.

 

Look at the slightly different trajectory seen in the Union government’s revenue expenditure growth during the same period. The Budget for 2024-25 had projected a rise of over 6 per cent to Rs 37.1 trillion in revenue expenditure. At the end of June 2024, the growth was just about 2 per cent, but it has been rising since then, reaching 4.2 per cent by the end of the first six months of 2024-25 and climbing even higher to 7.8 per cent during April-November 2024-25.

 

So, if revenue expenditure has gained momentum, why has capex failed to follow suit? A close analysis of the government’s capex numbers presents an interesting picture. Over 90 per cent of the Centre’s total capex during 2024-25 was accounted for by just six sectors — roads, railways, defence, telecom, transfer to states and new schemes. Their share in total capex in 2023-24 was a little less at 87 per cent.

 

But the 12 per cent decline in the first eight months of 2024-25 is primarily the result of a marked slowdown in only two of these six areas — roads and defence, which accounted for over 40 per cent of the total capex outlay for 2024-25. Capex on the construction of roads and highways fell by 16 per cent, while defence saw a decline of 15 per cent. This is serious and has worrying implications for both infrastructure and defence.

 

The problem of slowing expenditure in these two areas should not have been difficult to fix. Either effective monitoring of spending is lacking, or there are serious problems with project execution, reflecting the poor expenditure-absorbing capacity of these two sectors. This is borne out by a relatively good performance of the Indian Railways, which accounts for over 22 per cent of this year’s capex. At Rs 1.68 trillion, the Indian Railways’ capex is just about 1 per cent lower than its spending during April-November 2023.

 

With regard to the transfer of special assistance as loans to states for their capex and additional central assistance for their externally aided projects, the Union government’s performance was slightly better. In the April-November 2024-25 period, these transfers rose by about 5 per cent, although much lower than the budgeted increase of 41 per cent. In contrast, such transfers during the entire 2023-24 had risen sharply by about 24 per cent to Rs 1.15 trillion. It appears that these transfers will take a hit in the current year and for the first time since this initiative to help states boost their capex was undertaken a couple of years ago.

 

Significantly, this has not yet adversely impacted the states in a big way. The capex of 25 states (accounting for 95 per cent of all the states’ and Union territories’ total capex budget) has risen by just about 1 per cent in the April-November 2024-25 period, although states like Andhra Pradesh, Himachal Pradesh, Kerala, Mizoram, Odisha, Telangana, Uttar Pradesh, Uttarakhand, and West Bengal saw their capex fall by varying margins. Eventually, however, this will have an adverse impact on the states’ capex programme and its growth-enhancing effect.

 

There are two more sectors that account for another 13 per cent of the Centre’s capital expenditure budget. But they bring out an intriguing aspect of why the government’s capex has been slowing. They suffer from a peculiar problem, which has nothing to do with either the relevant sectors’ expenditure-absorbing capacity or the absence of effective expenditure monitoring.

 

The bulk of the capex under telecommunications was meant for infusing equity into state-owned Bharat Sanchar Nigam Ltd, or BSNL. Of the total capex of Rs 0.84 trillion, the proposed amount for BSNL’s equity infusion accounted for as much as Rs 0.83 trillion. But the total expenditure under this head in the first eight months of 2024-25 is only 6 per cent of what has been budgeted. In other words, a decision to transfer the equity amount promised to BSNL would increase the government’s capex by a significant margin. Why this money has not been transferred is puzzling. Last year, against a budgeted BSNL equity infusion of Rs 0.53 trillion, the actual infusion was higher at Rs 0.65 trillion. This year, no action on this front even after eight months is a puzzle as this failure also contributes significantly to the decline in the Centre’s capex.

 

More importantly, the Budget for 2024-25 had allocated a significant amount of Rs 0.66 trillion for capex on central sector schemes and projects. Of this, a large chunk, estimated at Rs 0.62 trillion, was earmarked for new schemes that the government would announce during the year. However, in the first eight months of the current year, only 4 per cent of that total outlay has been used up, leaving Rs 0.63 trillion yet to be spent. It is likely that the government may not need this amount or it may have kept its powder dry to meet any new schemes that it might announce later in the year, for which such capital allocations will be useful.

 

For the Union finance ministry, currently busy preparing the Budget for 2025-26, such a state of play with regard to slowing capital expenditure could well be an opportunity. With tax revenue growth slowing in the last few months, the possibility of an upside earlier expected on the revenue front may be receding rapidly. Revenue expenditure is also rising at a rate higher than the budgeted 6 per cent. If the fiscal deficit target of 4.9 per cent of gross domestic product (GDP) has to be met for 2024-25, which the government must in view of the uncertainties and challenges emerging both domestically and globally, the finance ministry may see in the composition of the current year’s capex a sliver of hope.

 

The finance ministry should not spend Rs 0.83 trillion for equity infusion into BSNL. Instead, it should ask the telephone company to raise resources from the market. The ministry should also desist from spending the remaining Rs 0.6 trillion earmarked for capital allocation to new schemes. Saving about Rs 1.43 trillion (a little less than half a per cent of GDP) will be a cushion against other expenditure slippages and revenue shortfall. Not too many tears would be shed for a squeeze on capex if the hit is primarily on infusing equity into a state-owned enterprise and on new schemes that are yet to be announced. Quite ironically, a slowdown in the government’s capex may well turn out to be an opportunity.