The Finance Ministry has asserted that it remains committed to its capex focus, consistent with recent years, and that maintaining the target at ₹11.11 lakh crore in Budget 2024-25 should not be interpreted as it lowering its ambitions or a shift towards a conservative approach.
In February this year, at the interim Budget stage, the capex allocation for 2024-25 was pegged at ₹11.11 lakh crore.
Ahead of the Budget, there was widespread demand from industry that the government continue with its capex-led growth strategy. Infact, there were even demands that the allocation of capex be hiked by 25-30 per cent from level of ₹9.5 lakh crore in 2023-24 to about ₹13 lakh crore for 2024-25. However, the Centre has settled for a 17 per cent increase as was the case at the interim budget stage.
capex target
“Retaining the capex target at same level as interim Budget does not mean we have been conservative in our approach to infrastructure development. Nor does it reflect any doubts about the absorptive capacity of the Centre or the States. One must recognise that even now the final allocation for 2024-25 is not lower than the vote-on-account (interim Budget) level,” top sources in the Finance Ministry said.
Moreover, there wasn’t any big jump in infrastructure spend by the Centre in the first quarter of this fiscal due to the general elections and model code of conduct. Also, almost four months have lapsed for this fiscal. Factoring the time remaining, retaining this target at same level as interim Budget is certainly “not conservative” approach or reflective of lacking any ambition, sources added.
Upasana Chachra, Chief India Economist, Morgan Stanley, said in a post-Budget research note that maintaining capex momentum was one of the three key takeaways from the Budget. The lower-than-expected fiscal deficit in Budget 2024 will further aid the crowing in of private capex and loans, she added.
Capex allocations
Radhika Rao, Executive Director & Senior Economist, DBS Group Research, said that maintaining capex allocations at ₹ 11.11 lakh crore were on expected lines. However, capital spending has seen a modest start so far this year, with a 14 per cent decrease in April-May 2024, partly due to the general elections. With eight months remaining in the fiscal year after the final Budget presentation, any increase in allocations may need to be reconsidered, based on progress made, she said in a post budget research note.
Goldman Sachs India Chief Economist Santanu Sengupta said in a post-budget Research Note that despite the fiscal consolidation, the government retained the capex target at 3.4 percent of GDP (17% yoy from FY24) and did not pivot towards welfare.
The proposed capital expenditure under the major ministries focused on infrastructure spending like Railways, Roads and highways are budgeted to grow at 4 percent yoy and 3 percent yoy, respectively below the nominal GDP growth assumptions of 10.5 percent yoy, while defence is budgeted to grow at 11 percent yoy over FY24, Sengupta noted. Interestingly Goldman Sachs had in earlier research notes highlighted that given the fiscal constraints, capex growth at 31 percent level was not sustainable.
It may be recalled that Modi-led government has over the last three years shown great commitment towards capital expenditure, with overall capex spends growing at a CAGR of 31 percent from FY21 through FY24.
Keeping the capex spend tempo going for 2024-25 despite the fiscal constraints is commendable, said economy watchers.
The surge in capital expenditure in recent years signifies a paradigm shift in economic dynamics. From an annual capex allocation of ₹2.5 lakh crore half a decade ago, the Centre has ramped up spending to ₹11.11 lakh crore annually for 2024-25.