During the past 18 months, Central Government capex (capital spending less loans and advances) has surged notably — it increased 52 per cent YoY in H1FY23 after posting around 70 per cent YoY growth in FY22. In H1FY23, the Centre’s capex amounted to ₹3.2 trillion, which was higher than the annual capex bill of FY21 (or any previous year); it stood at around 60 per cent of FY22 capex.

The Centre’s capex spiked to 2.3 per cent of GDP in FY22 and rose further to 2.5 per cent in H1FY23, from a steady level of 1.5 per cent of GDP in the 2010s decade. The foundation of the trending ‘imminent capex revival’ narrative is strongly driven by this spike in the Centre’s capex.

Nevertheless, the Union Government is only one branch of the public sector. Central Public Sector Enterprises (CPSEs) and State governments also constitute the public sector. CPSEs are of special relevance for this analysis because, in its bid to make fiscal math more transparent and relevant, the Government has shifted a portion of its off-book transactions into the fiscal accounts over the past 2-3 years.

The entire borrowing (totalling ₹650 billion each in FY21/FY22REs) by the National Highway Authority of India (NHAI) has been taken on the books by the Centre in FY23, thereby boosting the Centre’s capex and hurting that of CPSEs. It is, therefore, tricky but important to carry out apple-to-apple comparison.

Further, the Central Government also allocated more than ₹1 trillion as loans and advances to States in FY23 (and about ₹800 billion in FY21 to the Railways), which must be excluded. At the same time, we must include States’ capex. As many as 27 States (except Goa) and one Union Territory (Jammu and Kashmir) provide timely provisional monthly fiscal accounts, which help to prepare informed analysis of their financial positions.

Therefore, one must include capex of CPSEs and States with the Central Government capex to arrive at the overall public sector capex (ideally, one must also include States’ PSEs; however, it is not possible due to lack of data). Further, CPSEs’ data is available only on an annual basis (in the Union Budget documents), unlike monthly data for the Centre and States.

A combination of the Centre, States and CPSEs suggests that the public sector capex stood at 6 per cent of GDP in FY22 (with provisional data of the Centre and States and FY22 revised estimates for CPSEs). This was slightly lower than 6.1 per cent of GDP each in FY18 and FY19 but higher than 5.8 per cent of GDP in FY21 (see Chart).

This is because while the Centre’s capex increased to a 14-year high at 2 per cent of GDP in FY22 (excluding equity infusion into Air India), capex was broadly unchanged for States at 2.2 per cent of GDP and declined to at least a two-decade low of 1.7 per cent of GDP for CPSEs (excluding spending by the Department of Food and Public Distribution).

Can this change in FY23? Based on the available monthly data, the rise in the Centre’s capex in H1FY23 was largely offset by meagre capex growth for States. The States’ capex grew only around 2 per cent YoY in H1FY23 (with a contraction in Q1FY23) v/s 52 per cent YoY growth in the Centre’s capex.

In other words, while the Centre’s capex increased to an 18-year high of 2.5 per cent of GDP, States’ capex was just 1.4 per cent of GDP in H1FY23. The combined capex of the government (Center + States), thus, stood at 3.9 per cent of GDP in H1FY23, lower than 4.2 per cent of GDP in FY22 but higher than 3.7 per cent of GDP in the pre-Covid period. CPSEs’ capex is expected to decline for the third consecutive year in FY23BE to only 1.4 per cent of GDP.

Capex target

During the past three years, States have been able to achieve less than 75 per cent of their capex target (at only 26 per cent of BEs in H1FY23). Even if we assume an achievement of 80 per cent of capex target by States in FY23 and Centre’s achievement of its BEs (it has already achieved 52 per cent in H1FY23), the public sector capex would fall to an eight-year low of 5.7 per cent of GDP in FY23E.

Overall, there is no doubt that the Centre’s capex has spiked during the past 18 months or so. However, it is very likely that the re-classification of capex away from CPSEs has contributed to this surge. The share of the Center in public sector capex increased to 34 per cent in FY22 and may rise further to 39 per cent in FY23E (going by the above-mentioned estimates) from just about a quarter in the pre-Covid period. At the same time, the share of CPSEs has fallen to just 29 per cent in FY22 (from 38 per cent in the pre-Covid period) and could decline further to 24 per cent this year. All-in-all, an analysis of one part may be misleading if it is extrapolated to the whole. There are a few areas where extremely good and consistent data is available. The opportunity to conduct an accurate analysis and arrive at appropriate conclusions must not be lost.

The writer is Chief Economist at Motilal Oswal Financial Services Ltd