After the interim Budget last week, the headlines talked about a moderation in the Centre’s budgetary capital expenditure from FY24 to FY25, and the limits being approached by it in sustaining the (high) growth in taxpayer-driven public investments.
However, “public capex” is not merely the spending on asset creation via the Centre’s Budget. It also includes spending by public sector undertakings out of their profits and loans contracted, and capital expenditure via state Budgets, from the resources other than those received by them from the Centre or already counted in the latter’s capex.
An analysis of such “public capex” would show that both these perceptions—that government investments grew at an unprecedented pace after the pandemic and that it has now been curbed substantially for the next fiscal—are less real and more optics.
The Centre’s Budget spending on asset creation had been less than the central PSEs’ or states’ capex until the pandemic altered the composition in favour of the Centre. Capital expenditure by states, CPSEs and the Centre was roughly in the 5.5:5:3.5 ratio until the shift occurred.
To be sure, in the aggregate sum of Centre-CPSE capex, the CPSEs had a share of 55.2% in FY20, but it declined sharply to 20.4% in FY24 (RE) and is projected to fall further to just 18.4% in FY25.
States, which stepped up welfare spend during the pandemic, cut back on their capex, forcing the Centre to raise its borrowings and extend long-term soft capex loans to them, partially offsetting the decline in their share in gross tax revenue on account of the spike in central cesses.
Though the states paused to generate the capacity to spend the loan monies from the Centre, a chunk of which is reforms-linked, the process has got much faster in the current fiscal, and may gather more momentum in FY25.
As such, as noted by Crisil, if revenue grants to states for creation of capital assets are included, the annual growth of Centre’s Budget capex while moderating from 21.5% (FY24RE) to 17.7% (FY25BE), would still creep up as fraction of GDP from 4.3% to 4.6%.
Including CPSE capex, the growth is from 5.4% of the GDP in FY24RE to 5.6% in FY25BE. In FY17-FY20, this mix was 5.7% of GDP. So, what is afoot now is a gradual correction of the public capex composition, after the Centre sharply raised its share in it, rather than its slowing. Overall public capex pace, contrary to the dominant narrative, hasn’t risen above trend either.
The sharp rise in investment rate from 31.1% in FY21 to 34.9% in FY24 (advance estimate) is driven by a quickening of investment pace by the states and the CPSEs, besides the accumulation caused by consistently solid Budget spend by the Centre.
Credit offtake by corporate India has improved in recent months, and a few sectors are witnessing fresh investments. The government’s support to private investors includes fiscal consolidation, PLI and viability gap funding for green energy and affordable housing.
However, as L&T CFO R Shankar Raman told this newspaper, private companies don’t invest to get subsidies, but to earn returns, and it’s finally the demand scenario that would matter.
The past year saw a spurt in both the government’s and private companies’ interest burden on account of external debt, and investors may wait for lower interest rates too. What the Budget envisages is a prudent trade-off—short-term marginal compromise on growth, for long-term macroeconomic soundness. In the process, it still leaves a window for the private sector to design their investment plans.