The government’s capital expenditure (capex) usually bears the brunt when it looks to cut expenditure to focus on fiscal consolidation. However, the Budget for 2021-22 (FY22) is an exception.
The government has not only increased the capex for the current financial year in the revised estimates by 6.6 per cent to around Rs 4.4 trillion, but it has also raised it by 25 per cent for the next financial year. Besides, the Centre will provide Rs 2 trillion to states and autonomous bodies for their capex in the current financial year.
The reason for this is not difficult to fathom. Gross domestic product (GDP) is expected to contract by 7.7 per cent in the current fiscal, and the government is going the capex route to spur economic growth. It should be noted that the Budget has assumed a lower economic growth rate than the Economic Survey for FY22. While the Survey projected growth at current prices at 15.4 per cent, the Budget has pegged it at 14.4 per cent.
It is difficult to assess whether the Budget is assuming a lower rate at constant prices or inflation. The Survey assumed GDP growth rate at 11 per cent for the next financial year. By the Survey’s own admission, real GDP will grow 2.4 per cent over the absolute level of 2019-20, implying that it will take two years for the economy to go past the pre-pandemic level.
Finance Minister Nirmala Sitharaman said, “It was our effort that in spite of resource crunch we should spend more on capital. For 2021-22, I propose a sharp increase in capital expenditure and, thus, have provided Rs 5.54 trillion, which is 34.5 per cent more than the BE (Budget Estimate) of 2020-21.”
Of this, Rs 44,000 crore will be spent on projects and programmes that show good progress and are in need of further funds.
The government has decided to increase capex as private sector investment remains subdued because of a lack of demand, following the Covid-19-induced lockdown. Private investments remained lacklustre even after the lockdown was lifted.
Gross fixed capital formation (GFCF), which denotes investments, is projected to decline by 14.45 per cent in the current fiscal, according to the advance estimates. In fact, investments were slowing even before the lockdown was announced. For instance, GFCF fell 2.8 per cent in FY20.
As the government plans to shore up capex for FY22, revenue expenditure is projected to fall to Rs 29 trillion from Rs 30 trillion in the current fiscal.
At 15.91 per cent, the share of capex in total expenditure for FY22 is the highest in over a decade. It is projected at 13.55 per cent in the current fiscal.
This in contrast with recent trends as allocation towards capex was on the decline. It had touched 19.3 per cent in the Budget Estimates in FY05, but fell to 12.15 per cent in FY20, the lowest in 10 years. The previous high before this year was in FY08, when it touched 18.02 per cent.
Capex has been a casualty of the pandemic as new projects fell 87.6 per cent to Rs 0.87 trillion for the three months ended December 31, 2020. It was Rs 7.01 trillion the previous year.
Sitharaman said the government will also come up with specific mechanisms to nudge states to spend more on creating infrastructure.
Also, in accordance with the views of the 15th Finance Commission, the Centre allowed a normal ceiling of net borrowing for the states at four per cent of their respective gross state domestic product (GSDP) for FY22. A portion of this ceiling will be earmarked for incremental capital expenditure.
“Additional borrowing ceiling of 0.5 per cent of GSDP will also be provided subject to conditions,” Sitharaman said.
Government spending is expected to play a role in initiating the capex cycle, according to a Morgan Stanley India Company report dated January 17, titled ‘What to Expect from Budget F2022’.
However, it should be noted that the Centre’s capex is less than a tenth of GFCF.