Capital expenditure needs to be stepped up for the economy
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Capital expenditure needs to be stepped up for the economy

A sustained government expenditure on rural infrastructure will be critical to reduce rural distress.

  • February 16, 2016  
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SUNIL K. SINHA, Director & Principal Economist, India Ratings & Research

As the National Democratic Alliance (NDA) government embarks on presenting its second full Budget, the Finance Minister (FM) will face the onerous task of keeping the government finances in good health, despite the likely implementation of the 7th Central Pay Commission (7CPC) recommendation, and, secondly, restoring the business confidence in the economy, which has been sagging lately.

Macro-economic fundamentals are much better today than it was in May 2014. Also, India, as opposed to being a member of the 'fragile five', is perhaps the only shining star amongst the BRIC economies today.

Yet, the challenge, particularly of reviving investment demand in the economy, has remained as they were when the NDA government had assumed office. In my view, this will be the biggest challenge for the FM even when he presents the FY-17 Budget. In his FY-16 Budget speech, FM had stated that as private investment is not forthcoming, public investment needs to be stepped up to fi ll the gap and catalyse investment demand in the economy.

In this context, he announced an additional capital expenditure of Rs 70,000 crore, over and above FY-15 RE. Although, in y-o-y terms, capital expenditure of the government did show a growth of 25.5 per cent in FY-16 BE, a glance at the government capital expenditure as a percentage of GDP shows that it is still stuck at 1.7 per cent, which is also the average capital expenditure by the government between FY-12 and FY-15.

Another area that will require focus in this Budget is rural infrastructure, particularly irrigation, roads and agriculture supply chain. This is not to say that the last two Budgets of this government did not focus on this area. A sustained government expenditure on rural infrastructure is critical to reduce rural distress and provide gainful employment in rural areas.

Although the scope to ramp up tax revenues exists, in the absence of GST implementation, it will remain incremental. Garnering more non-tax revenue, particularly via disinvestment, has not been very successful in the past and is likely to remain so in FY-17.

However, there is a possibility of the government making a windfall gain in its non-tax revenue account, in case the spectrum sale takes place in FY-17. A sustained weakness in global commodity prices, particularly of oil, provides a good window for the government to keep its subsidy bill under check. Deregulating kerosene and LPG, in combination with widening the scope of the direct benefit transfer scheme, may lead to substantial reduction in government expenditure.

Implementation of 7CPC recommendation will add Rs 1.021 trillion to government expenditure in FY-17. However, a sizeable amount of this outgo will come back to the government exchequer in the form of income tax. In his FY-16 Budget speech, the FM had talked about raising the capital expenditure of the government by more than 0.5 per cent of GDP.

This did not happen in FY-16. Therefore, it will be interesting to see if he is able to do so in the FY-17 Budget and beyond, without compromising on the medium-term roadmap of fiscal consolidation. The imperative for the government to step up its capital expenditure nevertheless remains, and evidence shows that capital expenditure by the government crowds in private investment.

Written by SUNIL K. SINHA, Director & Principal Economist, India Ratings & Research