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Budget 2023: Government Spending Rise Likely To Remain Muted Amid Capex Push

Government spending growth is likely to be muted though thrust on capex is set to continue.

<div class="paragraphs"><p>Finance minister Nirmala Sitharaman. Source: Naveen Sharma/ Reuters</p></div>
Finance minister Nirmala Sitharaman. Source: Naveen Sharma/ Reuters

As the Indian economy continues on its path to recovery, government spending remains critical. However, the need for fiscal consolidation, along with slower nominal growth next year means that the government is unlikely to go on a spending spree, though its thrust on capex will likely continue.

The union government has remained cautious on spending, except for a sharp rise in FY21, when government expenditure rose by nearly a third to over 35 lakh crore. Thereon, the rise in government expenditure remains muted, growing by 7.4% in FY22 as per revised estimates and by 4.5% to Rs 39.4 lakh crore in FY23 as per budget estimates.

The government has so far spent Rs 4.47 lakh crore, or 59.6% of it's budget outlay between April- November 2022, compared to 49.4% in the same period last year, according to data by the controller general of accounts.

For FY24, spending growth is expected to moderate to 5-6% vis-à-vis an estimated increase of 10-11% in FY23, according to estimates by QuantEco Research.

The rise in expenditure is likely to be muted depending on how revenue performance for the current fiscal will be, according to Devendra Pant, chief economist and head of public finance at India Ratings. While tax buoyancy is strong this fiscal, it is partly because of high inflation, that will be lower next fiscal, he said. Government expenditure is unlikely to grow more than nominal GDP growth and is unlikely to be over 10%, according to Pant.

"If expenditure growth is lower than nominal GDP, that's fiscal tightening," he said. That is also evident in terms of nominal expenditure to GDP he said.

Though the pace of acceleration in government spending is likely to slow down as the government prepares for the glide path for FY26, it wouldn't be termed as fiscal consolidation, Ankita Pathak, economist at DSP mutual fund said. Pathak also expects expenditure to grow at about 5% year-on-year, with negligible growth in revenue expenditure and continued pick in capital expenditure.

In FY23, GOI expanded subsidies on fertilisers but trimmed food subsidy. This trend is likely to continue with overall subsidies growing at a modest pace, despite this being the election year, she said.

QuantEco Research also expects the anticipated moderation in government spending in FY24 to be predominantly be driven by a reduction in subsidy bill by 0.5% of GDP. "This in turn would be on account of discontinuation of the COVID era free food grain distribution scheme (PMGKAY), thereby helping to generate incremental fiscal saving of Rs 1 lakh crore," it stated.

Capex To Remain In Focus 

Capital expenditure as a share of total budget spending is estimated to have risen to 19% in FY23, the highest since FY05. The peak for capex as a share of total expenditure was in fiscal 2005 at 22.8%.

Will the union budget of 2022, push up the share of capex further, amid competing demands for revenue expenditure?

Capital expenditure between April-November 2022, capital expenditure is up by 61% Y-o-Y, capacity utilisation is clocking a healthy reading, credit growth is good, and like all capex cycles, this one has been led by public expenditure, Pathak said. The economy continues to need a push on capital expenditure which is likely to grow by at least 15% in FY24, she estimated.

Allocation for capex is likely to remain robust, touching a 2-decade high level of 3.0% of GDP in FY24, up from an estimated level of 2.8% in FY23, according to QuantEco Research. Focus on capex (under the National Infrastructure Pipeline), dovetailing with the PM Gati Shakti platform and Production Linked Incentives for the private sector could emerge as a policy thrust area for the government towards boosting India’s long term economic potential while providing an automatic stabilizer against global headwinds in the near term.

It is not correct to assume that capital expenditure will not rise without a rise in spending, N R Bhanumurthy, vice-chancellor of Dr. B.R. Ambedkar School of Economics University said. The FRBM act is not a expenditure compressing mechanism but an expenditure switching mechanism which means that additional borrowing should be used for capital expenditure and not for revenue expenditure, he said.

State Capex Lags

While central capex is close to target, state capex, which accounts for a larger share of aggregate capex, continues to lag and remains a concern, said Bhanumurthy.

The states put together (26 out of 28 states) saw a feeble 1.0% growth in capex between April to October 2022, according to QuantEco Research. While back loading of expenditure by states could partially explain this massive underperformance on capex, the centre could incentivize behaviour by increasing allocation to states under the Scheme for Special Assistance to States for Capital investment. It could also allow states to explore issuance of green bonds for dedicated green infrastructure, according to QuantEco Research.

In the previous budget, the centre had announced one lakh crore rupees to assist the states in catalyzing overall investments in the economy for 2022-23. The program should be scaled up or continued next fiscal too, Bhanumurthy said. However, borrowings by state public sector enterprises will be a part of net state borrowings and will be adjusted for four years as per the last notification by the department of expenditure, Pant said.

With no scope for reduction in revenue expenditure, and a compression on borrowings, where will adjustment take place? The axe is bound to fall on capex, he added.

The Big Picture 

Private spending is unlikely to see a meaningful revival in FY24 amidst continuing uncertainty, fresh sources of headwinds and easing exports, said Radhika Pandey, senior fellow at NIPFP.

Despite some early signs of recovery in private capex as seen indicators such industrial credit growth, it is not yet a meaningful replacement for government capex, necessitating the need for government support, she said.

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