Public spending is ticking well, multiplier effect can’t be far behind

India’s public capital expenditure, or capex (of Centre + states), is progressing at a rapid clip, an analysis of official statistics shows.

Two trends stand out. One, both central and state capex have crossed their pre-pandemic levels faster than the gross domestic product (GDP). And two, while the Centre’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.

In the line of sight

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 GDP in fiscal 2021 from 4.6% in fiscal 2020.

Even so, central capex was 31% higher on-year 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, the Centre has begun pruning certain spends, mainly revenue expenditure, as pandemicrelated relief measures¹ are rolled back, even as revenue collections have improved.

But it continues to press hard on the capex pedal, which is salutary.

In the first half of this fiscal (April-September), the Centre had spent 41% of its budgeted target for the entire year. On the other hand, state governments have managed to spend 29% of their targets (based on dataavailable for 16 major states² that account for ~80% of cumulative state capex).

¹For instance, budgeted expenditure MGNREGS for this fiscal 2022 is lower than the previous year. Further, central government ministries (with some exceptions) wererequired to restrict expenditure to 20% of budget estimates in the second quarter of this fiscal. However, relaxations were provided in case of an increase in capex.Source: Financial express, June 30 https://www.financialexpress.com/economy/govt-asks-various-ministries-to-restrict-expenses-at-20-of-budget-allocation-inseptember-quarter/2281540/
²These are: Andhra Pradesh, Bihar, Chhattisgarh, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, TamilNadu, Telangana, and Uttar Pradesh