The Capex Conundrum

Between FY22 and FY24, the Central government has pumped in funds worth Rs 22.77 lakh crore towards capital expenditure as a strategy to keep the economy afloat amid post Covid-19 disruptions. Expenditure on public capital asset formation in the three preceding financial years is almost 71% over and above funds worth Rs 13.28 lakh crore spent by the Centre between FY18 and FY22, rendering the budgetary allocation made under the head as one of the most sought after figure among the India Inc and policy watchers.

In the interim budget too, finance minister Nirmala Sitharaman has announced Rs 11,11,111 towards the Centre’s capital expenditure for the current financial year. This allocation may even go up when the full year Budget is tabled in mid July on the back of tax buoyancy as well as the dividend bonanza from the Reserve Bank of India.

The numbers look impressive from the cumulative point of view. However, a closer examination reveals that despite the mega allocation over the last couple of years, the capex strategy still lags severely on three fronts.

Firstly, Central capex’s share in the Gross Domestic Product (GDP) is still very low. Secondly, the current level of Gross Fixed Capital Formation (GFCF) in the economy is lower than the decade old trend. Thirdly, there is a huge concentration in the capex portfolio of the government with the major outgo lopsided towards the highways and railways sector.

In the budget 2017 – 18, the union government shifted to capital and revenue categorization of expenditure compared with the plan and non-plan categorization done till then. In FY18, actual capital expenditure at Rs 2.63 lakh crore was 1.53% of the GDP.

Even with the renewed push on the infrastructure spending by the government in FY22, which continued in FY23 and FY24, the share of government spending on capital expenditure to GDP remained at 2.5%, 2.73% and 2.79%, respectively.

Infrastructure sector observers are of the view that these levels are below the desired levels. “For the multiplier effect of the capital spending by the government in the economy to kick in, the desired ratio of the expenditure vis-a-vis GDP should be 5%,” an infrastructure expert said on condition of anonymity. In fact, the budgetary allocation of Rs 11.11 lakh crore for the current year towards capital expenditure comes to around 3.4% of the projected GDP for FY25. The interim budget estimated the nominal GDP growth rate of 10.5% for the current year while the 2023-24 provisional estimate for GDP (current prices) stands at Rs 295.35 lakh crore.

Yet another matter of concern is that the share of gross fixed capital formation (GFCF) in GDP – an important measure of addition of capital assets in the economy – is currently lower than the high levels seen more than a decade ago. According to data from the ministry of statistics and programme implementation, the share of gross fixed capital formation estimated at Rs 91.07 lakh crore in FY24 (provisional estimates) is 30.8%, against GFCF of Rs 29.97 lakh crore or 34.3% of GDP in 2011 – 12. In FY13 and FY14, the terminal years of UPA – II government, the share of GFCF came down to 33.4% and 31.3%, respectively.

Interestingly, in the first year of PM Modi-led NDA – I in 2014-15, GFCF at Rs 37.5 lakh crore stood only a notch above 30% of the GDP at 30.1%. Thereafter, for a significant period of seven years beginning 2015-16 and 2021-22, the share of GFCF in GDP remained below 30%. One may argue that GFCF also comprises acquisition of fixed assets by the business sector, as well as households, the government is not solely responsible for the dip. However, it may be noted that in the wake of demonetisation in 2016 and GST rollout in 2017, the individuals and the corporate sector were deprived of the ammo to pump in money into the economy. Therefore, the GFCF lag in the first seven years of the Modi regime indicates that infrastructure was not just a policy priority.

It, however, came back on the policy radar when Covid-19 ravaged the economy. While other economic engines like exports and private investments dried out, the government rightly turned to Capex beginning 2021-22 to pump prime the economy.

Beginning 2021 till the current financial year, the total amount committed to public infrastructure spending is to the tune of Rs 33.88 lakh crore. However, a significant trend that emerges is expenditure lopsided towards highways and railways rather than being broad-based, touching various other segments of the economy.

For example, the amount committed towards the ministry of railways between FY21 and FY 25 (budget estimate) stands at Rs 8.26 lakh crore. Similarly, the amount committed to the highways ministry has been to the tune of Rs 7.36 lakh crore during the same period. At Rs 15.62 lakh crore, it is quite evident that both railways and highways account for about half of the total infrastructure spending by the government ever since Covid-19.

Due consideration needs to be given by the Modi 3.0 to correct these anomalies. With the Central funding support, both the railway ministry and highway ministry have received in the last couple of years, it is incumbent on them to find funding models to crowd in private sector investments in the sector. It is time, both the ministries must strive towards more PPP models with the private sector, rather than depending majorly on the fiscal resources.

The government, meanwhile, should also focus on other significant areas of the economy such as housing, energy transition, semi-conductor, urban and rural connectivity projects and manufacturing. The focus should also be on creating business models and investments ecosystems around the already constructed mega infrastructure projects like the Delhi-Mumbai expressway, the dedicated freight corridors, or the Delhi-Meerut regional rapid transport corridors and the upcoming such corridors, while the push to spending on infrastructure needs to continue. The strategy needs to be a combination of fiscal support into the new areas of infra development, more and more PPPs and relevant policy push to attract investments around the already created infrastructure.