Finance minister Nirmala Sitharaman has allocated one of the highest capital expenditures of Rs7.5 lakh crore in FY22-23 in the Union Budget 2022-23.
This is up more than 35% from FY21-22 when the budgeted expenditure stood at Rs5.5 lakh crore. This outlay is 2.9% of the expected FY22-23 gross domestic product (GDP). However, there is more to it than meets the eye beyond the headline numbers, an analysis by CRISIL shows.
It says, “The 24.5% step-up in central government capex for the next fiscal as presented on 1 February 2022, is not as large as it seems if one considers the ‘offset’ through a reduction in internal and extra-budgetary resources (IEBR), which fund capex of central public sector enterprises (CPSEs).”
“That said, capex support for the states has increased, and employment generating sectors such as roads, highways, and railways have gained more attention. However, implementation and frontloading of capex can make or break actual outcomes,” the rating agency says.
According to CRISIL, the Budget impacts public investment in three ways: direct capex or budgetary allocations to ministries, grants for creation of capital assets, and IEBR (internal and extra budgetary resources), which is a below-the-line expenditure that does not impact the Central government’s fiscal deficit.
The rating agency says governments generally cut capex to make way for higher revenue spending during a crisis. This is precisely what happened during the global financial crisis in fiscal 2009. However, amid the current pandemic, the government has maintained its focus on capex.
The headline figure is the budgetary capex outlay of Rs7.50 lakh crore for FY22-23, 2.91% of GDP. This includes substantially higher ‘loans for capex’ to states at Rs1 lakh crore in the FY22-23 budget estimates (BE) compared with Rs15,000 crore the FY21-22 revised estimate (RE). Had this been in line with the previous years, budgetary capex for the next fiscal would have been lower at 2.58% of GDP, barely making it to this fiscal’s RE, the rating agency points out.
Secondly, it says, “the increase in ‘effective’ budgetary capex, which includes grants for creation of capital assets, has been offset by lower IEBR of CPSEs. IEBR has been budgeted at 1.82% of GDP for the next fiscal, much lower than the pre-pandemic average of 3.33% during FY17-18-FY19-20.”
“This shift away from IEBR to budgetary capex is likely the result of poor capex execution by CPSEs of late. Utilisation rates or the ratio of actual to budgeted expenditure came down significantly during the pandemic years (see chart 1),” the rating agency says.
The budgetary capex in terms of percentage of GDP has been revised up to 2.60% for this fiscal from 2.39% in the BE (see table below). However, this reflects inclusion of a one-time “capital infusion or loans to AI Assets Holding Ltd and Air India for settlement of past guaranteed and sundry liabilities, not backed by assets, worth Rs51,971 crore.”
After deducting this amount, the FY-21-22 RE for budgetary capex would actually be lower than the BE, at 2.37% of GDP, CRISIL says.
According to the rating agency, the overall central capex or the sum of effective budgetary capex and IEBR would remain intact at 5.96% of GDP for the next fiscal year, or the same as the FY18-FY20 pre-pandemic average.
CRISIL sees front-loading to lift demand faster. During the past few years, the Union government has entirely spent its capex budget — unlike states who have had a poor utilisation record.
The pandemic, however, impacted implementation speeds and ended up back-loading the capex by the Union government. For instance, the rating agency says in FY18-FY20, the pre-pandemic average of about 54.9% of the budgeted capex was spent during the first half of the fiscal. On the contrary, during FY20-21 and FY21-22, a major portion of the spending got pushed towards the last quarter (see chart below).
“Thus, frontloading of capex would be crucial to support economic recovery and provide a bridge from the short to the medium term, especially as the budget has steered clear of a strong consumption push,” it added.
The analysis by CRISIL shows defence, roads and highways, and railways are the big three line ministries that guzzle the Union government capex of over 70%. Interestingly, it says, both roads and highways and railways capex — that was given a push during the pandemic years — are slated to go up further next fiscal, even as defence capex marginally softens (see chart below).
“To be sure, the sharp rise in roads and highways capex to 0.73% of GDP next fiscal from 0.52% in FY22RE, reflects the greater contribution from budgetary resources, in the absence of corresponding IEBR support due to the National Highways Authority of India (NHAI)’s large debt build-up in the past. But overall, this expenditure mix trend augurs well for employment generation and achieving higher growth multipliers in the economy,” the rating agency says.
Given the reduced ability to borrow from the market — as the Union government has substantially increased its borrowing programme and yields rise, states need to front-load their capex.
However, states have consistently missed their budgeted capex targets (see chart above). “While there was some improvement in FY21, they seem to have lost the plot again this fiscal. In the first three quarters, states could incur only around 43% of the budgeted capex. So states must double down on their commitment and make full use of the increased capex loans,” CRISIL concludes.