COVID Pandemic Did Not Cause a Major Permanent Loss in Government Capex: CRISIL
Moneylife Digital Team 02 December 2021
The COVID-19 pandemic did not cause a major permanent loss in India’s public capital expenditure (capex) as per official statistics. Public capex can ignite recovery in an environment where weak demand has kept private sector investments tepid, says a research note.
 
In the report, rating agency CRISIL says, "Two trends stand out. One, both the Union and state government capex have crossed their pre-pandemic levels faster than the gross domestic product (GDP). And two, while the Union government’s capex has already crossed the pre-pandemic trendline, state capex, too, should achieve this feat if the budgetary targets are met. This implies the pandemic did not cause a major permanent loss in government capex in terms of trend. Studies have shown government capex has a higher multiplier effect on economic output compared with revenue expenditure.” 
 
For instance, a 2019 report by Reserve Bank of India (RBI) finds that Union government capex has a multiplier of 3.25, or a Re1 increase in capex pushes output up by Rs3.25. Similarly, a Re1 increase in state capex expands output by Rs2.
 
The multiplier, CRISIL says, works to ‘crowd in’ private investment, inducing a disproportionate increase in investments in the economy. 
 
"While conducive government support through policy measures such as the production-linked incentive scheme will act as further enablers for such crowding-in, an initial push by way of government spending to lead the investment drive is critical to creating multipliers. To boot, balance sheets of larger corporates have also improved and capacity utilisation in select sectors is rising, which augur well for investments," the rating agency says.
 
While COVID-19 necessitated huge spends by governments around the world, there was a simultaneous decline in their revenues, which led to higher fiscal deficit and debt. India’s fiscal deficit widened to 9.4% of gross domestic product (GDP) in fiscal 2021 from 4.6% in fiscal 2020.
 
Even so, the Union government capex was 31% higher year-on-year (y-o-y) in fiscal 2021. State capex, too, posted a modest rise over the low base of fiscal 2020. Note that state capex is typically 1.4 times higher than Central capex, thereby playing the predominant role in infrastructure building.
 
This fiscal, CRISIL says, the Union government has begun pruning certain spends, mainly revenue expenditure, as the pandemic related relief measures are rolled back, even as revenue collections have improved. However, it continues to press hard on the capex pedal which is salutary.
 
During the first half of this fiscal (April-September), the Union government had spent 41% of its budgeted target for the entire year. The Union government's capex for April-October 2021 was about Rs2.5 lakh crore. This is 28% higher y-o-y (on a low base) and represents 46% of the budgeted spend for the fiscal. Notably, it is 26% higher than the pre-pandemic, or fiscal 2020 level for the same period, the rating agency says.
 
Sector-wise, the Union government's capex was higher versus the first halves of fiscals 2020 and 2021, in road transport and highways, railways, housing, telecommunication, and health.
 
Separately, rural development spending, though included under revenue expenditure, about 80% of this is allocated towards creation of capital assets, on rural roads, housing, and other infrastructure showed a 14% increase over pre-pandemic levels.
 
On the other hand, state governments have managed to spend 29% of their targets, based on data available for 16 major states that account for about 80% of cumulative state capex.
 
During April-September 2021, capex rose 78% y-o-y in the 16 major states analysed. It was 17% higher than that in the corresponding period pre-pandemic. These states had spent around 29% of their budget estimates in the first half.
 
While this might seem low, states typically tend to spend most of their capex budgets towards the end of the year, CRISIL says, adding, for instance, between fiscals 2012 and 2020, states had, on average, spent only about 31% of the budgeted amounts in the first half.
 
Of the 16 states, six states, namely Chhattisgarh, Kerala, Madhya Pradesh, Punjab, Rajasthan and Telangana achieved the target set by the ministry of finance (MoF) of spending 45% of budget estimates by the first half. 
 
"This makes them eligible for availing additional borrowing of 0.5% of gross state domestic product for incremental capex in this fiscal. On the other hand, Maharashtra, Odisha, and Jharkhand lagged, having spent less than 20% of budgeted capex in the first half," the rating agency says.
 
CRISIL says, "If the budgetary targets for capex are met by both the Union government and the states this fiscal, the pre-pandemic decadal trend for the overall Union and state governments’ capex will be revisited."
 
Despite a tight fiscal position, the Union government’s capex grew 31% y-o-y last fiscal. The latest Union Budget targets a 26% increase over the revised estimates of last fiscal. "If this is met, the capex by the Union government could outpace the pre-pandemic decadal trend by about 12%. Put another way, capex by the Union government will have to grow 19% in the second half of this fiscal, on-year, to achieve that."
 
On the other hand, the rating agency says, if states spend as per targets this year, their total capex will cross the decadal trend by the end of this fiscal. That will require a 45% y-o-y growth in state capex in the second half, compared with 78% in the first half. This could be a tall order. CRISIL Research says it expects states to meet 80%-85% of their capex target this year.
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