Capex for revival

Govt has done well to increase expenditure

The biggest challenge for Indian policymakers at the moment is to lead the economy to a higher sustainable growth path. Although output has surpassed the pre-pandemic level, the disruption caused by the pandemic over the past two years would affect economic outcomes for quite some time. Besides, slowing global growth and higher inflation would affect economic recovery. As output contracted because of pandemic-related shutdowns, governments across the world, including in India, increased expenditure. Higher government expenditure on asset creation has helped at a time when private-sector demand remains weak. The government intends to follow this path to strengthen the recovery. In an interview to this newspaper last week, Union Finance Minister Nirmala Sitharaman underscored this point and noted: “The route we have chosen and the one we are sticking with is capex.”

The Union government’s capital expenditure outlay is estimated to be Rs 7.5 trillion for the current fiscal year. States would be extended interest-free long-term loans worth Rs 1 trillion from the capex outlay. As the finance minister noted, many states are ready with their plans and the entire amount could be given in the July-September quarter itself. The government has also done well to increase the monitoring of projects. It must be commended for increasing capital expenditure, which after many years crossed 2 per cent of gross domestic product (GDP) in 2020-21. It is expected to increase to about 2.9 per cent of GDP this fiscal year. While this is certainly an encouraging trend, there are still two questions worth debating here. First, would this be enough to put the economy on a higher growth trajectory? Despite the well-intentioned capex push, growth is likely to slip to about 4 per cent in the second half of this fiscal year.
 

Second, given the level of the fiscal deficit and public debt, would it be possible for the government to maintain the momentum on capex in the medium term? General government debt increased to about 90 per cent of GDP in 2020-21 and, according to estimates, is expected to remain elevated in the medium term. The government thus will need to bring down the fiscal deficit considerably in the coming years, which could affect allocation to capital expenditure. Even in the current year, while the government is confident of collecting higher revenue — a reasonable assumption, given the level of inflation and progress in tax collection—it would also have to spend more than what was budgeted at the beginning of the year.

In this context, it is worth noting that the government last week imposed an export tax on petrol, diesel, and aviation turbine fuel. It also levied a windfall tax on locally produced crude oil. These new taxes have clearly been imposed to improve the government’s revenue position, which is suffering partly because higher crude oil prices are not being passed on to the consumer. However, this sudden change in policy and imposition of new taxes are disturbing for businesses. This could affect investment and may hurt India’s energy security as investors will further turn away from the energy business. Since the government is pushing capex to revive demand, which would eventually drive private investment, it is important that it avoids introducing uncertainty in the business environment. For higher sustained economic growth, it is vital that public finances and policies are supportive.