Despite a sharp rise in capital spending by the central government, an underwhelming growth in capex by States and a likely drop in investments by central public sector enterprises (CPSEs), could drag India’s overall public sector capex to a multi-year low.
“The sharp surge in the Centre’s capex over the past 18 months or so does not imply higher public sector capex, which is what matters for the economy,” economists at financial services firm Motilal Oswal said in a research note titled ‘The curious case of fiscal investments’.
“While the Centre’s capex is budgeted to rise in 2022-23, it is likely to contract for the third consecutive year for CPSEs and remain broadly stable for States. Accordingly, public sector capex is likely to fall to an eight-year low of 5.7% of GDP in FY23,” it said. Public sector capex was 6% of GDP in 2021-22.
The Centre’s capex had spiked to 2.3% of GDP last year and has risen by another 52% in the first half of this year to touch ₹3.2 lakh crore, or 2.5% of GDP.
A study on State government finances released by rating agency ICRA on Tuesday, confirmed that States have not been doing too well on capex so far this year. While revenue deficits have narrowed sharply for 18 major States so far in 2022-23, their capital outlays have risen a mere 2.2% in the first half of the year, a far cry from their Budget target to raise capex by close to 38%.
While these 18 States had targeted a capex of ₹6.2 lakh crore, they managed to spend only about ₹1.59 lakh crore between April and September, and spending will have to be ramped up to ₹4.6 lakh crore in the second half to catch up to the target, ICRA economists pointed out. This is a sharp 57% increase over the ₹3 lakh crore spent in the second half of last year.
“Unless the execution of capital projects picks up considerably in the second half of 2022-23, the States’ capital outlay target for the year could be missed by a sizeable extent… Taking into account the trend of lower-than-budgeted capital outlay as well as back-ended spending in recent years, we are apprehensive that the combined spending of the 18 States could be around 23% lower than the Budget estimates,” they concluded.
Some of the States, including Andhra Pradesh, Haryana, Uttar Pradesh and West Bengal, have budgeted for a high 77%-127% growth in their capital outlays for this year.