State Capex Holds Key To Spending Boost As India's Growth Forecasts Are Cut
States have been slower in realising their capex plan.
India’s below-target capex spending, aided by states' expenditure, is expected to pick up in the second half of the fiscal as the government looks for a multiplier effect to shore up the economy when global headwinds undermine growth.
The average capital spending till August is around Rs 50,000 crore a month against the budgeted Rs 62,500 crore, Aditi Nayar, chief economist with ICRA Ltd., told BQ Prime. “While the year-on-year growth in capex is very high, the average monthly outgo trails the amount required to meet the full-year capex.”
Until August, capital expenditure stood at 33.7% of the full-year budgeted target of Rs 7.5 lakh crore, according to the latest CGA data. The target includes 50-year interest-free loans to states worth Rs 1 lakh crore. Even adjusted for that, the target is higher than last year’s upwardly revised estimate of Rs 6.02 lakh crore.
Capital expenditure till August stood at Rs 2.52 lakh crore, with a slow pickup in the disbursals under the interest free capex loan for state governments, Nayar said.
But she expects the spending to pick up in the second half of the year on the back of states utilising the interest-free loans and the capex-led growth agenda of the government.
The government is quite focused on recovery through capex, Rajani Sinha, chief economist at CARE Ratings Ltd., told BQ Prime. "While they might cut on other expenditure, the focus remains on capex and in the next few months, we may see government capex recovery if the current global concerns permit.”
Soumya Kanti Ghosh, group chief economist at SBI Research, cited last year's trend to point that the capex spending in the second half is expected to rise.
The percentage of actual capex to budget estimates till August 2022 was 31% but climbed to 99% of the revised estimate target Rs 6.02 lakh crore by March 2023, he told BQ Prime.
Ministries Cut Spending
Expenditure, in general, contracted between April and August this year with some ministries projecting significantly lower spending over the previous year.
Here's how much some of the ministries spent till August against the full-year target:
Civil aviation: 4%
Women and Child Development : 6%
Housing and Urban Affairs: 18%
Panchayati Raj : 16%
Health and Family Welfare: 29%
Meanwhile Ministries of railways (61%) ,and labour and employment (42%) had spent more than the previous year.
States, too, have been slower in realising their capex plan. States like Haryana, Rajasthan, and Kerala have been much slower than others on a year-on-year basis, according to data shared by Ghosh.
The end to GST compensation from June 30 could also be one of the reasons for the hesitant spending by state government in the first quarter, according to Sinha of CARE Ratings.
Of the aggregate data on state capex for 21 states analysed by the ratings firms, Sinha said while June quarter was slow, July trends indicated that the spend will pick up in the September quarter. State capex often picks up towards the end of the year, she said.
Finance Minister Nirmala Sitharaman, in an interview to the Business Standard in July, indicated that the interest free loan would be picked up by states before the end of the second quarter. Many states had already submitted their projects, both greenfield and brownfield for evaluation, she said.
Private Capital Green Shoots
The country’s private capital investment is also showing improvement, according to Sinha of CARE Ratings. Private partnership in new investment proposals jumped up to to 90% in the first quarter and to 95% in the second, she said, even though overall new investment proposals have fallen in the last two quarters.
“Taking into account the deleveraging that has happened, along with the increase in capacity utilisation and current drop in the commodity basket, there is optimism capex picking up going forward,” she said. “However global headwinds to India’s growth story remain key areas to watch out for.”
The spillover effects from a global slowdown could affect India's growth outlook for next year, Nomura had cautioned in its report. It expects current account deficit to widen and a weaker currency to follow.
The International Monetary Fund also reduced its growth projections for India in the ongoing fiscal to 6.8 %, citing a weaker-than-expected turnover in the September quarter and more subdued external demand.
India‘s own growth targets (expenditure and revenue) are also up for revision as the government began its discussions on revised estimates on the Oct 10. It's not clear if the higher revenue will be enough to offset the increase in the subsidy bill owing to fertiliser and food spends. The discussions are expected to conclude on Nov. 15.