Decoding The Capital Expenditure Budget: Motilal Oswal's Analysis

Motilal Oswal Report

Similar to the last two years, one of the most appreciated features of Union Budget 2023-24 has been the Government of India’s continued focus on improving the quality of expenditure by raising capital spending to Rs 10 trillion in FY24BE, up ~three times in just four years from Rs 3.4 trillion in FY20. If achieved, the GoI’s capital spending would jump to 3.3% of gross domestic product in FY24E, almost double of 1.7% of GDP during the pre-Covid period (FY18-FY20).

However, three important adjustments are needed to understand the true extent of the investment push by the central government:

1. Capital spending has two parts – capital outlays (or capex) and loans and advances. The central govt. has budgeted Rs 1.4 trillion (or 14%) of capital spending as loans and advances to the states, which should be subtracted from the Center’s capex, as it will be eventually be counted states’ capex.

2. Central govt. has also included equity infusion totaling Rs 529 billion to Bharat Sanchar Nigam Ltd. in FY24BE under capex. Since such spending does not generate a large economic multiplier and thus, should not be included in the capex.

3. Apart from GoI’s capex, the capital outlays of Central Public Sector Enterprises, excluding Food Corporation of India, must also be included to estimate the true investment plan of the central govt. This is more important since FY21, as the GoI has improved transparency by including off budget capex/borrowings of various CPSEs on its own books. As a result, while GoI’s capex is budgeted to increase next year, CPSEs’ capex will decline next year for the fourth successive year.

After making these three adjustments, our estimates suggest that the combined capex is pegged to grow 20.7% YoY in FY24, following 8% growth in FY23RE.

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