The government’s own capital expenditure (capex) is projected to rise a shade less than 7 per cent in 2019-20 (FY20) to Rs 3.38 trillion. As a percentage of the aggregate Budget expenditure, it is 12 per cent. It has not really moved from the level last year, but then a finding of resources for the now-expanded Pradhan Mantri Kisan Samman Nidhi and Ayushman Bharat, as well as the other new initiatives of the government, as expected, has cut the fiscal space for state financed capex. This means the bulk of public investment will have to depend on surplus, with state-run enterprises and initiatives like the National Investment and Infrastructure Fund (NIIF).
Even here, the financial space available has got restricted. The internal and extrabudgetary support of the state-owned enterprises will be Rs 8.76 trillion. It includes Rs 94,071 crore as budgetary support for the railways. This is 5.7 per cent lower than the sum for Revised Estimates for 2018-19 (FY19).
Since the Centre has also made it clear through Budget 2020 that it would not compromise on the fiscal deficit target as per the revised glide path, additional finance will have to come in the medium term from rationalisation and re-prioritisation of government expenditure. This would apply not only to cuts in revenue expenditure but also to improvements in the composition and quality of expenditure towards capital spend.
On a slightly upbeat note in FY19, the total government expenditure as percentage of gross domestic product (GDP) fell by 0.3 percentage points, year-on-year (YoY). Happily this was made possible by a larger reduction in revenue expenditure, which means there was a 0.1 percentage increase in capex. On a yearly basis, total government expenditure has grown by 7.9 per cent in FY19, with the capital component growing at more than twice the rate of growth in revenue.
The upshot of all these numbers is that while overall investment in the larger economy — measured through movements of real gross fixed capital formation — has increased by 10 per cent in FY19, the Centre has played and will play only a marginal part in the rise in FY20 too. This weakness in government finance means capital formation as a percentage of GDP at current prices has moved only slightly to higher at 29.3 per cent during FY19 and could put pressure in FY20.
So the heavy lifting in public investment has to be shouldered by the 257 operating central public sector enterprises. The net profit of these enterprises went up 2.29 per cent to Rs 1.28 trillion during 2017-18. And it is not as if these companies have been pouring their money into the central exchequer. Their contribution to the total government corpus decreased by 2.98 per cent in 2017-18, year-on-year. Yet as a comparative analysis of the performance of a few of these companies against their peers in the private sector using a five-year average net profit margin (in per cent) for select sectors show there is great scope for improvement among them.
The other mega candidate to top-up public investment will be the NIIF, which manages about $3 billion of capital commitments. In July, the State Bank of India (SBI) signed a memorandum of understanding to provide more capital for infrastructure projects. Basically, SBI with NIIF will provide a range of credit enhancements that can increase the rating of bonds floated by infrastructure companies.
In 2018, the government has launched a new credit rating system for infrastructure projects, based on an ‘expected loss’ approach. It provides additional risk assessment mechanism for informed decision making by long-term investors.
Further, measures like infrastructure investment trusts and real estate investment trusts have been formulated to pool investment in infrastructure too.