The interim Budget 2024-25 may see a largely sustained momentum in budgetary capital expenditure, even though it may come off the peak of the current financial year.
As per official sources, capex outlay for the next fiscal year will likely see a 10% increase over the elevated Budget Estimate for the current year, to come in at Rupees 11 trillion. This could ensure the ratio of Budget capex to GDP doesn’t fall below 3%, the level the FRBM Act suggests, with zero revenue deficit and 3% fiscal deficit.
This is part of a strategy to pare their debt burden and improve fiscal transparency. Despite 2024 being an election year, the government would continue with the thrust to capital expenditure next year as well to ensure the growth recovery remains on track, the source added.
In the interim Budget to be presented in Parliament on February 1, the Centre is likely to continue to fully fund the capex of the NHAI, given its poor financial health.
The government may also continue to provide long-term interest-free capex loans to states in FY25, to support economic activity across the country. The Centre has frontloaded capex in the current fiscal to impart momentum to growth. In H1, key ministries such as the ministry of road transport and highways, defence and the Railways accounted for more than 75% of the total capital expenditure.
However, as stated in the recently released mid-year review of the economy by the finance ministry, some expenditure re-prioritisation has lately been done to give succour to the vulnerable sections of the population, but capex focus will still be intact.
While budgetary capital spending grew 43.1% o year in April-September this fiscal, the pace reduced to 31% in April-November. Many analysts believe that the capex may undershoot BEFY24 at least marginally.
“Perhaps incremental capex may need to be limited to around Rupees 50,000-1,00,000 crore each in FY25 and FY26 (given that the government has to compress fiscal deficit further as per the medium-term plan to bring it down to 4.5% by FY26 from 5.9% in FY24),” Icra chief economist Aditi Nayar said.
The thrust on capex-led growth revival post-Covid led to substantial improvement in the quality of expenditure. Revenue expenditure as a percentage of the GDP rose sharply to 15.6% in Covid year 2020-21 from 11.7% in FY20, due to various relief measures announced to give succour to people. The capital expenditure also improved from 1.7% of GDP in FY20 to 2.2% in FY21. But as revenues improved after the pandemic, the government raised capex steeply in FY22, FY23 and FY24, leading to the ratio improving to 2.5%, 2.7% and 3.3%, respectively. At the same time, revenue spending declined from 15.6% of GDP in FY20 to an estimated 11.6% in FY24.
“We expect (the Centre’s) capex growth of 20-25% in FY25. We expect the Budget to continue to fund NHAI and railway capex fully, this is important for transparency,” said India Ratings chief economist DK Pant. High debt forced the Centre to halt fresh borrowing by the NHAI in FY23 and FY24. As a result, its budgetary support rose to a whopping Rupees 1.74 trillion in FY23, over three times the level in FY22. It is estimated to be Rupees 1.62 trillion for FY24.
The capital expenditure outlay for the ministry of road transport and highways, including NHAI, is likely to increase 25% on year in the next financial year to Rupees 3.2 trillion from Rupees 2.58 trillion in FY24. In April-November this year, the road ministry awarded a length of 2,815 km up to November this year as compared to 5,382 km during the period last year. For the full year, the target of awarding highways is 12,500 km.
For the third year, the government extended a massive budgetary capex support to Railways with Rupees 2.4 trillion for FY24, up 50% on the year and accounted for one-fourth of the Centre’s Rupees 10 trillion capex outlay.
Railways, which accounts for a quarter of the Rupees 6-trillion National Monetisation Pipeline (NMP) in four years through FY25, has done little to monetise brownfield assets to generate funds for new projects. NHAI, which also accounts for a quarter of the NMP, has done decent monetisation but fell short of the target in the first two years.
The government launched the NMP to generate some resources with a forward-looking approach and with a projected infrastructure investment of around Rupees 111 trillion during FY20-25 to provide high-quality infrastructure across the country under the National Infrastructure Pipeline (NIP). The NIP has 8,964 projects with a total investment of more than Rupees 108 trillion under different stages of implementation as of January 31, 2023. The bulk of it is by the central government itself.
To strengthen the hands of the states in the spirit of cooperative fiscal federalism, the scheme for providing financial assistance to the states for capital expenditure introduced in 2022-23 has been extended in FY24, with a 30% enhanced outlay of Rupees 1.3 trillion. The scheme will likely be extended for another year. The RBI in state finances report suggested that within the scheme, a separate head for climate-related investment projects can be considered.