India’s capex is bouncing back, and this bodes well for economic recovery

The capital expenditure of the central and state governments has crossed pre-Covid levels—a positive development that can help the economy recover faster especially as weak demand keeps private-sector investments tepid.

The rapid growth in public capex implies the Covid-19 pandemic didn’t cause a major permanent loss in government capex in terms of trend, according to a report by Crisil Research.

The report said that while the Centre’s capex has already crossed the pre-pandemic trendline, state capex, too, should achieve this feat if the budgetary targets are met.

The pandemic prompted governments around the world to ramp up their spending but also dragged down their revenues. This led to higher fiscal deficit and debt. India’s fiscal deficit widened to 9.4% of GDP in 2020-21 from 4.6% in 2019-20. Even then, central capex was 31% higher in 2020-21, the report said.

State capex posted a modest rise over the low base of 2019-20. State capex is typically 1.4 times higher than central capex, and so plays the predominant role in infrastructure building.

First-half data

This fiscal year, the Centre has begun pruning certain spends, mainly revenue expenditure, as pandemic-related relief measures are rolled back. But it continues to press hard on the capex pedal. In the first half of this fiscal (April-September), the Centre had spent 41% of its budgeted target for the entire year.

For April-October 2021, the Centre’s capex was about Rs 2.5 lakh crore. This is 28% higher from a year earlier and represents 46% of the budgeted spend. It is also 26% higher than the pre-pandemic level for the same period.

On the other hand, state governments have spent 29% of their targets, according to data available for 16 major states that account for about 80% of cumulative state capex, the report said. While this might seem low, states typically tend to spend most of their capex budgets towards the end of the year. For instance, between fiscals 2012 and 2020, states had, on average, spent only 31% of budgeted amounts in the first half.

During April-September, the capex rose 78% on-year in the 16 major states. This was 17% higher than in the corresponding period before the pandemic.

Of the 16 states, Chhattisgarh, Kerala, Madhya Pradesh, Punjab, Rajasthan and Telangana achieved the target set by the Ministry of Finance of spending 45% of budget estimates by the first half. Maharashtra, Odisha, and Jharkhand spent less than 20% of budgeted capex in the first half.

What this means for economic recovery

Public capex can help GDP growth recover at a time when weak demand has kept private investments tepid as government capex has a higher multiplier effect on economic output compared with revenue expenditure.

Crisil cited a 2019 Reserve Bank of India report that found central government capex has a multiplier of 3.25. This means a one rupee increase in capex pushes output up by Rs 3.25. Similarly, a one rupee increase in state capex expands output by Rs 2. This multiplier induces a disproportionate increase in investments in the economy.

Crisil also said that an initial push by way of government spending to lead the investment drive is critical to creating multipliers and that policy measures such as the production-linked incentive scheme will enable crowding-in of private investments. Moreover, balance sheets of larger companies have improved and capacity utilisation in select sectors is rising. This augurs well for private investments, Crisil said.