Capex boost. Budget 2023 to reinforce capex-led growth strategy, bring back animal spirits: Economic Survey

The Centre’s capex-led growth strategy of recent years got a big thumbs up from the latest Economic Survey, which has predicted that this strategy is bound to bring back “animal spirits” in the economy on the back of early signs of a rebound in private investments.

This trend of increased Centre’s capex push is expected to be reflected in the Union Budget for 2023-24 to be presented by Finance Minister Nirmala Sitharaman on Wednesday, the Economic Survey for 2022-23 hinted on Tuesday.

From a level of ₹3-lakh crore in 2018-19, the Centre’s budget on capex has been systematically going up year after year and has now reached a level of ₹7.5-lakh crore in 2022-23. Indications are that Budget 2023-24 will see a bump up in capex to at least ₹9.5-lakh crore.

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Growth driver

The latest edition of the Economic Survey highlighted that the Centre’s capex spending increased by 63.4 per cent in the first eight months of FY23 and was another growth driver of the Indian economy in the current year, crowding in the private Capex since the January-March quarter of 2022.

“On current trend, it appears that the full year’s capital expenditure budget (₹7.5-lakh crore) will be met. A sustained increase in private Capex is also imminent with the strengthening of the balance sheets of the corporates and the consequent increase in credit financing it has been able to generate. A much-improved financial health of well-capitalised public sector banks has positioned them better to increase the credit supply,” the Survey said.

Going by the Capex multiplier estimated for the country, the economic output of the country is set to increase by at least four times the amount of Capex, the Survey noted. States, in aggregate, are also performing well with their Capex plans, it added.

“Like the Central government, States also have a larger capital budget supported by the Centre’s grant-in-aid for capital works and an interest-free loan repayable over 50 years. This Capex-led growth strategy will enable India to keep the growth-interest rate differential positive, leading to sustainable government debt to GDP in the medium run,” the Survey added.

‘Leadership role’

Asserting that incipient signs of a new private sector capital formation cycle are visible, the Survey suggested that private Capex soon needs to take up a “leadership role” to put job creation on a fast track in the country. It was the budgeted capital expenditure — which rose 2.7x in the last seven years from FY16 to FY23 – that reinvigorated the capex cycle, the Survey pointed out.

In absolute terms, the Central government had budgeted an unprecedented ₹7.5-lakh crore of Capital expenditure for FY23, of which more than 59.6 per cent has been spent from April to November 2022. During this period, capital expenditure registered a y-o-y growth of over 60 per cent, much higher than the long-term average growth of 13.5 per cent recorded in the corresponding period from FY16 to FY20.

The government’s thrust on capital expenditure, particularly in the infrastructure-intensive sectors like roads and highways, railways, and housing and urban affairs, has longer-term implications for growth.

Supply-side productivity

As capital expenditure strengthens aggregate demand and crowds-in private spending in risk-averse times, it also enhances supply-side productivity over the long run.

The Centre’s emphasis on capital expenditure has continued despite higher revenue expenditure requirements during the year. The Centre’s Capex has steadily increased from a long-term average of 1.7 per cent of GDP (FY09 to FY20) to 2.5 per cent of GDP in FY22.

The Centre has also incentivised the State governments through interest-free loans and enhanced borrowing ceilings to prioritise their spending on Capex.

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