Slowing capex: Focus more on growth dynamics than changing target norms

A slowdown in the Union government’s capital expenditure is not only evident but it has already raised doubts over the achievability of the target of spending Rs 11.11 trillion, as budgeted for 2024-25. By way of comfort, however, officials in the Union finance ministry have indicated that the sharp fall in capital expenditure in the first half of the year should be corrected in the second half and annual expenditure could be slightly higher than in 2023-24.

 

Remember that the Centre’s capital expenditure last year was estimated at Rs 9.48 trillion, representing a rise of 28 per cent over that in 2022-23. It has been growing at a rapid pace after Covid. In the last four years, it has seen a compound annual growth rate of over 29 per cent, an unprecedented achievement. And this growth was ensured after strictly monitoring expenditure disbursements to ministries and even to states to prevent wastage and misuse. Steps were taken to improve the quality of expenditure by making sure that the central ministries did not bunch up their spending in the last quarter of the year or the states did not substitute their own expenditure with what they were getting from the Centre.

 

Now, it seems those guardrails are being relaxed to ensure that some growth in capital expenditure is maintained in the current year as well. Senior finance-ministry officials have reportedly stated that curbs under cash-management guidelines could be relaxed in the January-March quarter of 2025. In other words, central ministries and departments could spend more than 33 per cent of their annual capital expenditure estimates in the final quarter this financial year.

 

This move may help the Centre step up the pace of its capital expenditure. But the idea of relaxing cash-management guidelines is not a wise move in the current context. Capital expenditure undertaken in a rush with the primary intention of meeting the target before the end of the year dilutes the quality of that exercise and undermines the benefits that the economy reaps from such investment. Instead of quick-fix solutions like relaxing the cash-management norms, the government would do well to examine why the pace of capital spending has slowed considerably and introduce corrective measures.

 

It is, therefore, important to appreciate the underlying nature of the problem. The Centre’s capital expenditure fell by 35 per cent in the first quarter of 2024-25, for understandable reasons. General elections were held during this period and the full Budget was presented only in the third week of July. In the second quarter, the pace of capital expenditure picked up, but grew by only about 10 per cent. Clearly, this was not enough to overcome the setback of the first quarter. Thus, the first half of 2024-25 saw an overall decline of 15 per cent in capital expenditure. From October 2024 onwards, therefore, it will be a difficult task for the Union government to ramp up its capital spending to achieve an annual growth rate of 17 per cent. The question, however, is whether those proposals for relaxing cash-management guidelines will have any real impact.

 

The problem with the slowdown in the government’s capital expenditure is that even the states are facing problems in maintaining the momentum of such spending this year. Almost all the states saw their capital expenditure grow at a healthy rate in the past few years, although the pace was lower than that of the Centre. But the first half of 2024-25 has seen the major states’ capital expenditure decline by about 12 per cent. In other words, the entire government system in the country is facing a kind of bottleneck in stepping up its capital expenditure. This needs to be studied before remedial measures can be planned.

 

It would appear that the absorptive capacity of the sectors where the Centre and the states are trying to pump in additional capital expenditure is facing a constraint, which needs to be addressed before any other step is contemplated. Are these signs of a more broad-based slowdown in the pace of economic growth? The strategy of ramping up government investment immediately after Covid worked for the economy. Has the time for a change in that strategy come?

 

Equally important is the fact that in spite of an overall decline, capital expenditure on roads and railways has maintained a steady pace, accounting for a spending of 52-54 per cent of their annual capital expenditure outlay. It would appear that other sectors of the economy have been laggard. Taking a cue from this expenditure trend, the Centre should examine the other sectors and study the specific problems that are coming in the way of a swift disbursement of funds.

 

It is also possible that a mid-year re-prioritisation of capital expenditure will help in directing more resources to sectors such as roads and railways, where the spending pace has been rapid. This might mean a cut in capital outlays for sectors that have failed to spend a large portion of the resources allocated to them. Cash-management guidelines should be used also to stipulate spending a minimum portion of the annual outlay allocated for a certain ministry. If that minimum amount is not used in the specified quarter, the government should be able to redirect the unused portion to ministries or sectors that are in need for more resources. There is no reason to believe that what is allocated to a certain sector at the start of the year should be set in stone.

 

A more serious problem pertains to the states’ inability to spend the capital expenditure their governments allocate for different sectors. Unfortunately, there is no coordinated examination of why some states are spending more and why others are reporting a shortfall in their expenditure. The fact of the matter is that states like Assam, Karnataka, Maharashtra, Tripura, Rajasthan, West Bengal, and even Punjab have seen increases in their capital expenditure in the first half of 2024-25, compared to the same period of 2023-24. Equally surprising is the decline in the capital expenditure during the same period in states like Andhra Pradesh, Bihar, Chhattisgarh, Haryana, Gujarat, Madhya Pradesh, Uttar Pradesh, Uttarakhand, and Telangana.

 

Patterns of capital expenditure have a bearing on economic growth. With their huge spending power, states have as big a role in economic development as the Union government. Perhaps a small division in the finance ministry or the NITI Aayog could examine the capital expenditure trends in the states and provide policy inputs to the state governments to introduce necessary corrective measures. States, after all, are important not just for reining in the government’s fiscal deficit but also for maintaining the economy’s investment tempo.