Budget 2024: Govt likely to go slow on CAPEX push this time

With the government’s consistent push to increase budgetary allocation for infrastructure spending, it’ll be interesting to know its plans in the Interim Budget 2024-25 for the current fiscal year. Experts say in the backdrop of healthy domestic growth amid a tepid external outlook, the FY2024-25 target for the government's capital spending, which is a key engine of growth, will be keenly watched when Finance Minister Nirmala Sitharaman announces the budget on February 1, 2024.

However, the budget this time being interim, it’s likely that the government will go “slow” on infrastructure spending after a huge 33% increase in the CAPEX target in 2023-24.

Ratings agency ICRA estimates the capex target at ₹10.2 lakh crore for FY2025, implying a sharp slowdown in growth to 10% from over 20% seen in each of the post-Covid years. The Centre is expected to ensure adequate allocations towards the infra sectors such as roads, highways, railways, etc., in FY2025, says the agency, adding that the defence capital could see “enhanced” spending. It is being attributed to the Centre’s focus on encouraging the development and production of emerging technologies.

ICRA has placed the target for gross capital expenditure at ₹10.2 lakh crore in FY2025, up from ₹10 lakh crore last year. "Given our expectations of a Rs 750-billion shortfall in capex for FY2024, it would imply a sedate YoY growth of 10%, compared to the expansion of over 20% seen in each of the post-Covid years." The government's total expenditure is also estimated to grow by 5% to ₹47.4 lakh crore in FY2025.

Experts at Deloitte say higher capex spending by the government is expected to crowd in capital spending. That said, it will require some government incentives and a few measures in this direction.

Insurance giant PNB Paribas-led brokerage Sharekhan says a continuation of the existing policies framework including the PLI scheme, promotion of green technology and digital push along with fiscal discipline, with the extension of capex programs would be considered encouraging in the existing investment environment.

It expects the government spending on infrastructure to grow at a slower pace at high single to low double digits compared to an over 30% CAGR witnessed over the trailing four years. "In contrast, we believe the government would incentivise private capital spend (especially towards manufacturing and housing industries), which has remained modest over the past years due to global uncertainties and lower consumer spending."

Brokerage major Motilal Oswal says the government’s capital spending can grow by 15% next year, rising to 3.5% of GDP in FY25F. "After a massive (average) growth of 32% during the past four years (FY21-FY24F), we believe that GoI’s capital spending growth would weaken to 15% next year." Although it will be lower than in the past few years, a 15% growth in capital spending could also see significant growth. “This would mean a further rise of GoI’s capital spending to 3.5% of GDP from 1.7% in FY20 and 3.4% of GDP in FY24F.”

Notably, the government had enhanced the total Capex outlay in the Union Budget 2023-24 by 33% from ₹7.5 lakh crore to ₹10 lakh crore, which took CAPEX to an all-time high of 3% of GDP. The Centre expects the private investment to revive to complement the Capex outlay.