The 2023-24 Budget’s biggest highlight was the increase in Capital expenditure allocation from Rs 7.5 lakh crore in BE (Budget Estimates) 2022-23 to Rs 10 lakh crore for BE2023-24 – an increase of over 33%. Capital investment of a little over 22% of entire expenditure budget of Rs 45 lakh crore and about 3.3% of the estimated GDP of Rs 301.75 lakh crore can indeed be a major booster for kicking up growth cycle.
On the face of it, such mega capital push by the government for sustaining growth momentum in India will be most opportune, particularly at a time when recession is looming large in the wider global economy.
Whether this large dose of Capex will do the job for India, we perhaps need to get into the entrails of the proposed Capital expenditure budget.
Public Sector Capex Is Much Less Than the Headline Number
Capex in central government and central public sector in India takes place through two channels—from the budget and through Internal and Extra-Budgetary Resources (IEBR) of public sector enterprises.
In BE2022-23, total public sector Capex was Rs 12.20 lakh crore comprising Rs 7.5 lakh crore through budget and Rs 4.7 lakh crore through IEBRs. Budget 2023-24 increases this to Rs 14.89 lakh crore, comprising budget Capex of Rs 10.01 lakh crore and IEBR of Rs 4.88 lakh core. Total public sector Capex increase is of Rs 2.69 lakh crore. As increase in IEBRs is quite subdued, overall increase in Capex comes down to 22%, and not 33%.
Further, when one examines the nature of Capex provision, one finds that certain expenditure provisions are not Capex at all.
To take one big example in case of IEBRs, the Department of Food and Public Distribution (DoFPD) has IEBR of as high as Rs 1.45 lakh crore in BE2023-24. The IEBR of DoFPD is not for any capital expenditure. It is essentially for taking credit from banks for buying and stocking food grains. Excluding this increase, the public sector IEBR Capex comes down to Rs 3.43 lakh crore.
Government Capex of Rs 10 lakh crore includes loans to the state governments for capital expenditure of Rs 1.3 lakh crore in BE2023-24. Capex loans to the states are neither central government’s Capex nor additional Capex for the economy as such Capex loans substitute states’ own borrowings for Capex to that extent. If we exclude Rs 1.30 lakh crore, the centre’s budgetary Capex falls to Rs 8.71 lakh crore.
Together, the adjusted IEBR of Rs 3.43 lakh crore and budgetary Capex of Rs 8.71 lakh crore makes up total Capex of Rs 12.04 lakh crore. Centre’s Capex provision through budget of Rs 8.70 lakh crore is 2.88% of GDP, not 3.3%, as claimed by the Finance Minister.
Budget Capex Increase Substitutes and Hides Increasing Financial Weakness of Public Sector Entities
Centre’s actual budgetary Capex of Rs 8.70 lakh crore continues with substitution approach. Last year, the government had budgeted for meeting the entire Capex needs of National Highways Authority of India (NHAI) and BSNL on account of their inability to access financial markets. This year, the budget treats Indian Railway Financing Corporation (IRFC) as not market-worthy.
IRFC which was budgeted to raise Rs 66,500 crore last year as IEBRs, will raise nothing this year from the market. The entire IRFC Capex has been substituted by increasing budgetary Capex allocation of Railways from Rs 1.37 lakh crore in BE2022-23 to Rs 2.40 lakh crore in 2023-24.
The government has also disingenuously provided Rs 30,000 crore as capital support to Oil Marketing Companies, presumably to colour the revenue support on account of losses in LPG and oil products as capital expenditure in the form of equity.
Capital support to NHAI has been increased from Rs 1.34 lakh crore in BE2022-23 to Rs 1.62 lakh crore, ie, an increase of Rs 28,000 crore. Capital support to Railways has been increased by an additional Rs 36,400 crore, over and above in lieu of IRFC. If these organisations were in the pink of health or really commercial, they would have raised these resources from the market and not from the government budget.
All these substitutions add up to Rs 1.61 lakh crore. Excluding this amount from the Capex budget of Rs 8.7 lakh crore, brings the capex through the budget to only Rs 7.1 lakh crore. This Capex is less than the BE2022-23 capex of Rs 7.5 lakh crore. Unfortunately, the hard reality is that there is no real increase in capital expenditure through the budget in 2023-24BE.
Budget Capex May Not Ward-Off the Risk of Global Recession
The Economic Survey projects India's GDP growth at 6.5% in 2023-24. That is not a high enough growth for realising the dream of a USD 5 trillion GDP by 2026-27 and USD 10 trillion economy by 2035. But, it is nonetheless, a decent growth rate in the face of low growth of about 2.9% in the world with some countries, mostly advanced economies, likely to slip in recession.
Will the nominal budget Capex of Rs 10 lakh crore and actual Capex of Rs 7.1 lakh crore contribute to warding off the threat of global recession? Looks doubtful? Let me explain why:
First, there is no real budget Capex increase.
Second, entire Capex budget might not actually be spent. For 2022-23, the RE budget Capex has been reduced to Rs 7.3 lakh crore from budgeted Rs 7.5 lakh crore. There is likely to be further downward revision in actuals. Similar fate might befall the Capex budget of 2023-24.
Third, a good chunk of centre’s Capex goes in non-growth promoting investment. Defence equipment and armament capital budget of Rs 1.62 lakh crore, about 23% of total Capex of Rs 7.1 lakh crore (while quite justified from national security considerations) does not lead to any production of goods and services, and, therefore has no contributory effect on building growth foundation.)
Fourth, it is believed that the Capex budget generates higher manufacturing output- more cement, steel and other construction materials for building roads, laying railway lines etc. and more machines like railway engines, bogies, electric lines etc. Let us do a reality check. Growth in production of these materials and machines is captured in the manufacturing gross value added (GVA).
Despite elevated capex budget provision of Rs. 7.5 lakh crore for 2022-23, the GVA growth of manufacturing plummeted to only 1.6% in 2022-23, as per advance estimates released by NSO on 6th January. Likewise, there was no good impact on improving capacity utilisation. Perhaps, there is no good direct relation between India’s current capex budget increases and manufacturing growth.
Fifth, high Capex is funded by high fiscal deficits. Budget 2023-24 expenditures are also funded by high dose of about 6% of fiscal deficit. Such high fiscal deficit has good relationship with the interest rate scenario in the country and with private sector investment. Private sector investment flags off in such situations which neutralises the public sector investment.
Sixth, global recession adversely impacts India’s growth through export-import channel. Reduction in global demand for Indian exports and increased imports on account of lower import prices impact India’s consumer durable and non-durable GVA mostly. Government Capex hardly touches these sectors of manufacturing.
Let Us Not Overplay the Capex Card
High Capex budget comes at a high fiscal cost. Burgeoning debt and liabilities of the government of India escalates interest burden for sure. India’s interest payments increased by about Rs 1.35 lakh crore in 2022-23. These payments are expected to increase by another Rs 1.4 lakh crore in 2023-24. In two years since 2021-22, India’s interest payment budget has increased by Rs 2.75 lakh crore a year over the interest payments of Rs 8.05 lakh crore in 2021-22.
India’s Capex in defence, railways, roadways, metros etc does not yield any financial return. In some sense, these are more akin to revenue expenditures. Consequently, such high growth in interest payments translates into permanent fiscal liabilities and fiscal stress.
Growth impact of our budgetary Capex is not quite clear and perceptible but expanding interest burden is real. Let us not overplay the virtues of high Capex budgets.
(The Author is the Chief Policy Advisor, SUBHANJALI, Author: The $10 Trillion Dream and Former Finance and Economic Affairs Secretary, Government of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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