Sluggish Government Capex Poses Risks To Full-Year Growth Despite Recovery Expectations

The central government's capital expenditure remained sluggish at the beginning of the second half of the fiscal 2024-25. Despite expectations for a growth rebound, weak spending from both the central and state governments could continue to dampen economic growth.

India's real gross domestic product growth decreased to a seven-quarter low of 5.4% year-on-year in the July-September quarter, down from 6.7% in the previous quarter. Alongside slower growth in industrial gross value added, primarily in manufacturing, both private consumption and capital expenditure showed reduced growth compared to the first quarter, according to expenditure trends.

Although government spending increased by 4.4% year-on-year, capital expenditure growth slowed to 5.4%, mainly due to weak spending by both the central and state governments.

Data from the Union Government reported by the Controller General of Accounts indicated that capital expenditure contracted by 15% during April-October period, totaling Rs 4.66 lakh crore, which is about 42% of the full-year target of Rs 11.11 lakh crore. In contrast, revenue expenditure for the same period grew at a faster pace of 8.6%, reaching Rs 20.1 lakh crore, or approximately 54.1% of the fiscal target.

During the first half of the current fiscal year, the government’s capital expenditure was nearly 10 percentage points lower than the average for the first half of fiscal years 2019 to 2024, which was 47.7%, according to a research note by the State Bank of India.

The situation for the states is more concerning, with only five out of 17 major states showing an increase in expenditure during the first half. This is identified as a contributing factor to the low growth in the second quarter of the current fiscal year. Due to stringent conditions on state expenditure, no significant increase in spending is anticipated during the second half of the fiscal year, as stated by Soumya Kanti Ghosh, Chief Economic Advisor at SBI. He added that this would likely keep overall growth numbers between 6% and 6.5% for the current fiscal year.

Research firm Emkay noted that the slowdown in capital expenditure is widespread across major sectors. Their analysis revealed that spending in the road sector reached Rs 1.5 lakh crore in the first seven months of the current fiscal year, reflecting a 16% decline compared to the same period last year, compared to a 5% growth in the budget estimates for fiscal 2025. In defense, capital expenditure amounted to Rs 66,300 crore from April to October, marking an 11% year-on-year decrease, in contrast to the projected 11% growth in the budget for fiscal 2025. Additionally, the railways sector reported Rs 1.6 lakh crore in spending during the April-October period, showing no change year-on-year, while a 4% growth target was outlined in the budget estimates for fiscal 2025.

Capital expenditure loans to states have also fallen short, totaling Rs 52,100 crore, which represents a 21% decrease year-on-year against the 22% growth targeted in the budget estimates for fiscal 2025. Madhavi Arora, lead economist at Emkay, highlighted this shortfall, adding that states have struggled to ramp up their capital expenditure, further contributing to the overall economic slowdown.

As of October, with slow capital expenditure performance, the implied spending requirement for the remainder of the current fiscal year has risen to 61% year-on-year, according to Arora, adding that the required monthly run rate now stands at Rs 1.3 lakh crore. While spending in the three major categories—roads, defense, and railways—is expected to increase, capital expenditure loans to states are likely to remain below target, Arora said.

This could result in total capital expenditure falling short of the budgeted Rs 11.11 lakh crore for fiscal 2025, Arora noted. However, she predicted that the headline capital expenditure as a percentage of GDP is projected to rise to 3.3% in fiscal 2025, compared to 3.2% in the previous fiscal year.

Samiran Chakraborty, chief economist at Citi, also projected that central government capital expenditure would grow by about 20% year-on-year between November and March 2025, while Tanvee Gupta Jain, chief economist at UBS, expects the capital expenditure to increase by 25-30% year-on-year in the second half of the fiscal year.

"We anticipate that India's real GDP growth will see a cyclical recovery in the second half of fiscal 2025, driven by demand during the festive and marriage seasons, improved rural sentiment, and a likely increase in overall government spending," UBS concluded in a note.

The lack of clear domestic demand in the Indian economy means that private investment is not widespread, leading to an over-reliance on public investment, according to JP Morgan. If public investment decreases, as seen in the last two quarters, weaknesses in private sector demand may become apparent. Teresa John, an economist at Nirmal Bang Institutional Equities, expressed similar concerns regarding this issue.