Will India see a govt capex surge in FY25?

The government stepped up its capex budget in recent years to improve India’s creaking infrastructure, create jobs and accelerate economic growth. It budgeted ₹10 trillion to develop infrastructure in the current fiscal year, marking a 37% increase from the previous year, with growth rates of 24% in FY23 and 40% in FY22.

Buoyant tax collections have given finance minister Nirmala Sitharaman more fiscal space to enhance spending on infrastructure. Tax collections have been stronger than expected this year, with total government revenues expected to substantially exceed budgeted estimates amid increased economic activity.

The finance ministry is examining the higher capital spending proposal to boost investments in various infrastructure projects, one of the two people said, requesting anonymity.

With more than 60% of the budgeted capex allocation already spent during the first half of the fiscal, more funds would be needed to complete the larger projects proposed under the government’s Vision 2047 programme to achieve developed country status when India celebrates 100 years of freedom from British rule, the person said.

“Higher capex is likely to be announced in the interim budget with the growth in the range of 20-25%. This would help a portion of additional capital to be deployed in projects in the early part of the year before the general elections. The numbers could be revised further when the full budget is presented sometime in the second half of 2024," the second person said, also requesting anonymity.

A spokesperson for the finance ministry didn’t respond to emailed queries.

Senior government officials said the enhanced capex allocation would be made without disturbing the government’s fiscal consolidation path due to robust tax collections and a fresh move to check unproductive revenue expenditure.

The fiscal consolidation path outlined by the Centre is expected to narrow India’s fiscal deficit to 4.5% of gross domestic product over the next two years from 5.9% currently.

The higher capex allocation would also benefit states as they would get more funds under the interest-free scheme, Special Assistance to States for Capital Investment, provided in last year’s budget, with an allocation of ₹1.3 trillion. With central capex in FY25 expected to increase by about 25-30%, the fund allocation for states is also expected to increase to ₹1.6-1.7 trillion, the people cited above said.

Economists said that higher government spending will also help draw in investments from the private sector.

“After a severe setback during covid, capacity utilization within India’s manufacturing sector had been inching up since early FY23, reaching pre-covid levels by March 2023. Private capex is usually triggered once utilization starts to breach three-fourth of capacity, and we are very close to this level. However, revival in private capex has been on the slow track this time," said Debopam Chaudhuri, chief economist at Piramal Enterprises Ltd.

Though private investments have picked up in recent months, they are yet to reach levels where central support to push up growth could be cut back. An uncertain global economic outlook, with high interest rates, galloping inflation and rising geopolitical risks, have prompted many companies to delay big projects.

The government expects higher public spending will help crowd in private investments. But a higher allocation for food and fertilizer subsidies before the national elections next year may put additional strain on finding the funds for the massive capital-spending programme despite buoyant revenue collections.

While raising public spending is being considered, there is a concern in some quarters about whether the Centre can exhaust the entire ₹10 trillion capex budgeted for the ongoing fiscal. However, the spending pattern of ministries overseeing infrastructure sectors, including the ministries of road transport and highways, railways and ports, has remained robust, with some exhausting more than 60% of the record FY24 allocation in the first half of the year and on track to use up the entire allocation by January. These ministries have already requested a higher allocation for FY25 to complete a large pipeline of projects. The government’s focus on infrastructure development continues to remain high in the fields of connectivity, physical infrastructure and energy, and these would continue to be funded, the people said.

However, the rapid pace in capex growth in the past few years cannot be sustained for too long, Goldman Sachs said in an October report, adding that private investments will need to pick up as public capex peaks.

“We expect a pickup in private investment activity in coming years to be driven more by domestic demand and easing of supply-side bottlenecks," the report added.