The finance minister is holding review meetings on the performance of capex of CPSEs every month, underscoring the urgency to revive the economy, which is projected by many agencies to contract by 9-15% in FY21.
While revenue constraints led to a slowing of capital expenditure by state governments in FY20, the CPSEs owned by it largely held the fort.
The Centre has asked the central public sector enterprises (CPSEs) to make a quantum jump in their capital expenditure in this financial year and the next, as it is hamstrung by budget constraints to stimulate economic activity. The prime minister’s office (PMO) has directed 13 petroleum-sector CPSEs to double their capex to Rs 2 lakh crore in FY21 from the initial target of Rs 1 lakh crore and scale it up further to Rs 3 lakh crore in FY22.
This is despite the fact that H1 capex performance of these companies were less than a third of yearly target. Similarly, Coal India’s (CIL) capex target has been raised by 30% to Rs 13,000 crore for FY21 and to Rs 20,000 crore for FY22.
The nudge by the government to augment capex may necessitate a significant increase in market borrowings by these firms, considering that in the last 3-4 years, many of them have used up their cash reserves to support the economy hit by a prolonged sluggishness in private investments.
Given that the Centre and state governments themselves have stepped up their borrowings in the year to unprecedentedly high levels owing to revenue constraints, the crowding of the market could impact private-sector borrowers.
In a video conference meeting held with CMDs of 13 petroleum-sector CPSEs and Coal India on October 19, finance minister Nirmala Sitharaman expressed dismay over the ‘underperformance’ of CPSEs belonging to the petroleum sector in H1FY21. “Capex performance (32% of FY21 target in H1FY21 versus 40% in H1FY20 of corresponding annual target) is abysmally low against the revised target given by PMO to CPSEs of ministry of petroleum and natural gas. There is no improvement in performance. First quarter was (a wash-out) due to Covid-19, but performance has not improved in second quarter in spite of review and monitoring. She (FM) asked the CMDs to visit project sites in the field in order to find out and resolve issues at ground level and submit complete report by October 31, 2020,” according to an internal document reviewed by FE.
Against the annual target of Rs 16,667 crore for the two CPSEs in coal sector (CIL and Nayveli Lignite Corporation or NLC), the achievement was only Rs 6,009 crore or 36% in H1FY21. While CIL achieved about 48% of its FY21 target of `10,000 crore, the NLC achieved only 18% of its target of about Rs 6,667 crore for FY21. NLC said capex in respect of three projects would commence in Q4FY21 and flagged the issue that due to change in scenario of power market, state governments/discoms are not willing to sign power purchase agreement (PPA) and prefer to purchase power from power exchanges.
Four capex performance review meetings have been held so far this fiscal at the level of finance minister. In addition, principal secretary to prime minister, PK Mishra also reviewed their capex on September 17 wherein capex target petroleum and coal CPSEs were scaled up for FY21 and FY22.
During the video conference, Sitharaman asked the 14 CPSEs in the petroleum and coal sectors to accelerate spending to achieve 75% of their annual (FY21) capex targets by the end of December quarter. This is daunting task for these firms, since in April-September, they have met only 32% (Rs 37,423 crore) of their FY21 capex target of Rs 1.16 lakh crore. The achievement was lower, compared with 39% (Rs 43,097 crore) of the relevant target achieved a year ago.
As reported by FE earlier, the finance ministry has already told CPSEs/undertakings with an annual capex budget of Rs 500 crore and more that they must achieve 150% of the initial capex target of Rs 4.9 lakh crore in FY21. This is despite the fact that these large CPSEs – companies and undertakings – achieved 30% of their capex target for FY21 in the first half of the financial year, by spending almost Rs 1.5 lakh crore. That was still a creditable achievement, as it reflected that these companies have managed to hold on to the capex pace shown in recent years in the first half, despite the Covid-19 shock. In the last few years, CPSE capex has remained robust; the ratio of capex deployment between the first and second halves of a financial year has been 3:7.
The finance minister is holding review meetings on the performance of capex of CPSEs every month, underscoring the urgency to revive the economy, which is projected by many agencies to contract by 9-15% in FY21. The idea is to soften the blow to the economy from the sharp drop in private investments and slashing of capital expenditures by revenue-starved states.
While revenue constraints led to a slowing of capital expenditure by state governments in FY20, the CPSEs owned by it largely held the fort. The combined capital expenditure by the CPSEs with annual capex budgets above `500 crore turned out to be Rs 4.41 lakh crore or 90% of the target in FY20.
With private investments in the doldrums, gross fixed capital formation (GFCF), which was 31.1% of the gross domestic product (GDP) in FY15, declined to 29.8% in FY20. The fall would have been sharper had the CPSEs not acquitted themselves well. In recent years, public capex has been roughly in the 5:5.5:3.5 ratio among the CPSEs, states (budget) and the Centre (budget).