Budget may not inspire investments

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The central government plans to spend Rs.3.4 trillion on capital expenditures in 2019-20. This would be 6.9 percent higher than the revised estimate of Rs.3.1 trillion spent on the capital account in 2018-19. The budgeted growth on capital expenses is half the growth of 14.4 percent envisaged on revenue expenses.

Interest payments are likely to grow by 12.4 percent. Arguably, this expenditure growth cannot be controlled much because commitments to make these expenses were made in the past. But, subsidies and other revenue expenses are also budgeted to grow by 11.7 percent and 15.9 percent, respectively, which are also significantly higher than the budgeted growth in capital spending.

Capital expenditures had shrunk by 7.5 percent in 2017-18. This was the first year since the crisis year of 2008-09 that central government spending on capital account had shrunk. Growth in central government spending on capital account has averaged at 16 percent per annum for the eight years from 2009-10 through 2016-17; and it has never registered a fall in any of these years. The 7.5 percent fall in 2017-18 is therefore, extraordinary.

Revised estimates for 2018-19 indicate a growth of 20.3 percent. Unfortunately, this handsome growth number is mired in data gobbledegook (see footnote 1). It is more likely that the growth during 2018-19 was a shade over 15 percent and not 20 percent. This is not too bad, given the average growth of 16 percent per annum we have seen the preceding 8 years. But, it does not compensate for the sharp fall of 7.5 percent in the preceding year.

And now, in 2019-20 the budgeted expenditure on capital account is even lower at 6.9 percent.

The finance minister’s speech suggests that the government would continue to focus on the infrastructure sectors it has been developing with the help of schemes such as Pradhan Mantri Gram SadakYojana and Bharatmala for roads, Sagarmala for coastal projects, Jal Marg Vikas for inland water transport and UDAN for airways.

Budgetary allocations indicate that roadways and railways take the dominant share in the overall capital spending of the government. Roadways accounts for 21.3 percent of the total capital spending and railways accounts for 19.5 percent. The two together account for nearly 41 percent of the total capital spending of the central government. Their combined share in 2012-13 was just 18 percent. This shot up to 30 percent in 2016-17 and now it’s up to 41 percent.

According to the revised estimates presented in the budget papers, central government budgetary expenditure on railways increased by 22 percent in 2018-19 and, it increased 35 percent on roadways. The allocation to railways is now budgeted to increase by 24 percent but, that for roadways is budgeted to increase by only 5 percent.

Budgetary support to the capital spending of the aviation ministry has been cut sharply to just Rs.250 million from Rs.40 billion in 2018-19.

The telecommunications ministry has received a 44.5 percent increase in capital budget to reach nearly Rs.50 billion. The ministry of shipping has also seen a 43 percent increase to Rs.2.7 billion. The increase in the ministry of water resources, river development and Ganga rejuvenation is relatively modest at 14 percent to reach Rs.3.9 billion.

The budget has not made any specific effort to motivate the private sector to come out of its shell and invest aggressively into building new capacities. The corporate sector has withdrawn from investing in recent years. This is evident from their financial statements that show very tepid growth in net fixed assets. During fiscal 2017-18, these grew by a mere 6.8 percent. And, it is also evident in the lack of announcements of new significant projects. New investment project proposals by the private sector during 2018-19 was Rs.6.7 trillion which was the lowest since 2013-14.

The minister’s remark that India requires investments averaging Rs.20 trillion or USD 300 billion a year (para 30 of her speech) is apparently an underestimate. India is already investing of the order of Rs.56 trillion a year, which is the gross fixed capital formation in 2018-19.

India needs a lot more than Rs.20 trillion or even Rs.56 trillion. With an economy of Rs.190 trillion in 2018-19 that is likely to grow by 12 percent according to the budget to Rs.212 trillion in 2019-20 it possibly needs an investment of about Rs.64 trillion. The central government has budgeted to contribute Rs.3.4 trillion to this.

Footnote: 1. We know from the Controller General of Accounts that the government’s revised estimates of its capital spending during 2018-19 are overstated by 4.5 percent. The government’s revised estimate is Rs.3.17 trillion. This is the same as the estimate it presented in its interim budget on February 1. However, on May 31, the CGA released the estimate at Rs.3.03 trillion. The CGA’s estimate is reliable and the finance minister’s estimates are not updated. If we use the CGA’s estimates for 2018-19 and 2017-18, the growth works out to 15.4 percent.

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