Capital account

Dependence on govt expenditure for growth must be reduced

Government capital expenditure has been a significant growth driver in the post-pandemic period, prompting suggestions, particularly from industry, that the Union government should further increase the allocation in the upcoming full Budget for this financial year. However, there are limits to which government capital expenditure can push growth, primarily because of two reasons. First, the government has to progressively bring down the fiscal deficit to a more manageable level. Second, there are systemic capacity limits in terms of absorption. More broadly, increasing capital expenditure should not be an end in itself. While capital expenditure will add to output, benefits will be higher if projects are selected on merit and potential. Therefore, a balance is necessary. While the Centre has been spending the allocated sum, the states are lagging — indicating limits to absorption capacity.

As reported by this newspaper recently, the provisional data for 25 states — reviewed by the Comptroller and Auditor General of India — showed they managed to spend 84 per cent of budgeted capital allocation in 2023-24. Only four states exceeded the target. Experts argue one of the reasons for the shortfall could be viable projects not being available. The other reason is that states tend to wait till the end of the financial year to release funds, which affects outcomes. A recent research note by economists at Axis Bank also highlighted execution risk. Actual capital expenditure by states was 10-15 per cent lower than the Revised Estimates over the past two financial years. Part of the reason for falling short could be the substantial increase in capital expenditure allocation. Therefore, there is a need to balance fiscal intervention and expectations.

In terms of overall fiscal outcomes, the above-mentioned research note, which looked at the finances of the 20 largest states, accounting for 95 per cent of gross domestic product (GDP), showed states had budgeted for a fiscal deficit of 3.2 per cent of GDP in the ongoing year. However, given the past trend of the actual deficit being lower than the Revised Estimates, the final number may be 2.8 per cent of GDP. Further, since the state deficit includes loans given by the central government, the addition to the general government deficit would be 2.5 per cent of GDP. Fiscal management, however, would remain complicated for some states like Punjab and Himachal Pradesh, which have outstanding liabilities above 40 per cent of gross state domestic product.

Meanwhile, the Centre will have to make fiscal corrections in the coming years to stabilise the general government debt and deficit at reasonable levels and it will be important to review expenditure carefully — the fiscal deficit for the current year is budgeted at 5.1 per cent of GDP. Thus, private investment must pick up pace to sustain the economic growth momentum. However, the data analysed for nearly the top 1,000 companies by this newspaper — excluding financial services — showed investment growth slowed in 2023-24 to 7.6 per cent compared to 12.2 per cent in the previous year. This reversal needs to be properly understood. In the context of the upcoming Union Budget, since the government is already spending over 3 per cent of GDP on capital expenditure with the aim of attracting private investment, the focus should perhaps now shift to creating enabling business conditions and incentivising private investment.