Last year’s Union Budget was termed as a ‘capex carnival’ by many as the Centre decided to boost the capital expenditure budget for FY 23 by a massive 35.4 per cent to ₹7.5-lakh crore to help the economy revive from the pandemic. The economy is benefiting from this large spending — gross fixed capital formation for FY23 is projected to increase 11.5 per cent according to First Advance Estimates of National Income by the Ministry of Statistics and Programme Implementation. It’s therefore desirable from the larger economy standpoint that the spending on capex stays elevated this year as well.

This view was reinforced by economists and industry captains at a recent panel discussion on the Budget organised by this newspaper. Interestingly, the panelists also underlined that the States and the private sector need to play their part in this. Capex spends by both the States and the private sector have been sluggish this year. The Budget needs to find a way to address this issue. Of the average annual investment of around ₹10-lakh crore (total capex is ₹90-lakh crore) in infrastructure, the Centre and the States spend around ₹4.5-lakh crore each with the private sector and households accounting for the rest. The H1 growth in capex of States has been quite low at just 7 per cent and the spending also varies considerably between States. The Centre will have to devise ways to incentivise States to spend on infrastructure investment; rewarding them based on outcomes. Incentives also need to be given for investing in sectors such as irrigation and urban transport where States need to spend more. Industrial investments by the private sector have been patchy. Some traditional manufacturing sectors such as metals, chemicals and cement have started spending on capex since they have garnered market share during the pandemic. However, with consumption yet to revive meaningfully, those such as automobiles have not reached peak capacity utilisation yet.

The Performance Linked Investment schemes have been helpful in boosting investment in recent years and these are likely to account for around 15 per cent of private capex between FY22 and FY27. The Centre should increase its allocation towards, and coverage of, the PLI schemes. Most of the PLI investments, 55-60 per cent, is currently flowing into new-age or green technologies.

That said, the Centre is likely to have less fiscal room in FY24 to pencil in a large capex spend, given the higher base created last year, slower pace of growth in tax collections, and more demands for social spending next fiscal year. A positive in the Union Budget has been the decline in the ratio between revenue and capital expenditure from around six times, a few years ago, to around four currently. The key will be to make the States toe a similar line and divert more funds into asset creation.