Budget
Centre to take foot off capex pedal after FY25 budget
Summary
- The Union government may boost capex allocation by 25% to a record ₹12.5 trillion in 2024-25, Mint reported in November. However, the Centre is also keen to bring the fiscal deficit below the targeted 4.5% by 2025-26.
NEW DELHI : After an expected spurt in the next fiscal year, government capital expenditure (capex) may grow at a more sedate pace in the years ahead as the Centre sets its sights on fiscal consolidation, two people aware of the plans said.
The Union government may boost capex allocation by 25% to a record ₹12.5 trillion in 2024-25, Mint reported in November. However, the Centre is also keen to bring the fiscal deficit below the targeted 4.5% by 2025-26.
Accordingly, it prefers a more moderate capex growth after 2024-25, one of the two people said on the condition of anonymity. By then, private investments are expected to do the heavy lifting as well.
“The fiscal consolidation target is sacrosanct," the person said. While the government’s capex will continue to increase after 2024-25 in absolute terms, the rate of increase will not be as steep as it is now, the person added.
Meeting the fiscal consolidation target is difficult, but not impossible, said the second person, adding the government could bring down fiscal deficit from 9.2% in 2020-21 to 6.4% in 2022-23.
A second reason for the modest increase in capex after 2024-25 is the saturating fund absorption capacity of central ministries, barring Railways, the first person said. A strategy for meeting the fiscal consolidation target by 2025-26, including expected tax buoyancy—rate of tax collection growth over economic growth rate—and disinvestments will be specified in the budget documents, the person added.
Among infrastructure sector ministries, Railways has multiple plans to strengthen its network and introduce high-speed trains, including bullet trains. These capital-intensive and long gestation projects would keep the growth appetite of Railways alive for a longer period of time.
For the third straight year, the government extended a massive budgetary capex support to Railways with ₹2.4 trillion for 2023-24, up 50% on-year, which accounted for a fourth of the Centre’s ₹10-trillion capex outlay. With Railways all set to utilize its entire capex by February-end and ready with the next set of projects for execution, additional funds are expected to be made available in the budget for 2024-25 as well.
Experts said an eventual moderation of the Centre’s capex growth is necessary.
“The fiscal consolidation path has to be spelt out and consistent with that, the overall growth in government expenditure and the adjustments needed, both on the revenue side and on the capex side will have to be spelt out. Going by the present tax collection growth rate, it seems that there may have to be some reduction in capex after 2024-25," said D.K. Srivastava, chief policy advisor at EY India.
Srivastava also said there are signs that private sector investments are already picking up. The statistics ministry said last month that the economy is set to witness ₹88.3 trillion investments in fixed assets, accounting for capex by the Centre, states and private sector companies. This is an improvement of over 11% from that of the year ago period, without adjusting for inflation.
A Goldman Sachs report in October 2023 said the rapid pace in capex growth in the past few years cannot be sustained for long going forward, and private investments will need to pick up as public capex peaks.
“We expect a pick-up in private investment activity in coming years to be driven more by domestic demand, and easing of supply-side bottlenecks," the report had added.
gireesh.p@livemint.com
