Given how consumption has been slowing for several quarters now, the government needs to ensure large capacities are being built so that jobs can be created. However, at a time when the private sector is barely investing, the government too hasn’t stepped up allocations meaningfully for infrastructure. Even as the Union budget attempts to address the distress in rural India and also the concerns of the less privileged through bigger allocations for the rural sector, it has set aside very little to boost investments. The projected direct capital expenditure of Rs 3 lakh crore is higher by just about 9.9% over the revised estimate of Rs 2.7 lakh crore. In fact, it is smaller than the budgeted capex of Rs 3.1 lakh crore for FY18. Worse, if one includes the spends from extra budgetary resources, the total public sector capex is projected to grow by just 4%, to Rs 7.78 lakh crore; this compares very poorly with the 9% increase in FY18. As in recent years, much of the direct budget—or about Rs 1.12 lakh crore—has been allocated for roads and railways.
In the meanwhile, the state governments too do not appear to be spending much on capex. The combined capital expenditure of 23 states between April-December 2017 was `2.04 lakh crore, down 2% over the `2.08 lakh crore spent in the corresponding period of 2016. This is surprising given most states aren’t over-spending, though many of them could be in trouble as they have announced large farm loan waivers. For instance, Uttar Pradesh has spent less than `19,000 crore in the April-December period, which is about a 60% drop over the previous year; the state had announced a big write-off of farm loans. Other states where capex has shrunk include Bihar, Rajasthan, Tamil Nadu and Madhya Pradesh.
Since states are being compensated for any loss of revenue from the GST, they should have been in a position to invest in infrastructure. However, for whatever reason, most states are not even able to exhaust their very modest capex targets. The deceleration in investments is posing a serious threat to growth. It seems unlikely there will be a big pick-up in investments for another three years. While the turn in the interest rate cycle has further queered the pitch, the problem of over-leveraged private sector balance-sheets is taking time to be addressed.
While growth may have rebounded in the last quarter and may continue to do so again in the second half of FY18, it cannot gather momentum unless the investment cycle is kick-started. While the reallocation of assets—via the insolvency resolution process—may help in pushing up production, such activity is unlikely to create more jobs. And without more jobs it is unlikely consumption demand can pick up meaningfully.