Vijay Kumar Gaba

One of the most praised features of the Union Budget for FY23 presented last week is the emphasis on capital expenditure. The government, industrialists, bankers and many market participants have highlighted that the sharp rise in allocation for capital expenditure in the budget shall catapult the economy into a higher growth orbit and accelerate the employment generation.

Incidentally, the allocation for capital expenditure in the budget is also one of the most criticized items. Experts have highlighted that the higher allocation for capital expenditure in the budget is not only an optical illusion but may also be misdirected as it is mostly focused on the transportation sector and defense and completely ignores priority sectors like tourism, food processing, bio technology, higher education, sports & youth affairs, etc. The opaqueness in the matters of capital expenditure also raises doubts over the government's commitment to transparency in accounting.

What the finance minister said

In her budget speech, the finance minister gave an impression that the allocation for the capital expenditure in the union budget for FY23BE is being sharply increased to 2.9% of GDP.  This is an increase of 35.4% over FY22 and more than 2.2x the allocation for FY20. She also emphasized that investment taken together with the provision made for creation of capital assets through Grants-in-Aid to States, the ‘Effective Capital Expenditure’ of the Central Government will be 4.1% of GDP.

“…the outlay for capital expenditure in the Union Budget is once again being stepped up sharply by 35.4 per cent from Rs5.54 lakh crore in the current year to Rs7.50 lakh crore in 2022-23. This has increased to more than 2.2 times the expenditure of 2019-20. This outlay in 2022-23 will be 2.9 per cent of GDP.

With this investment taken together with the provision made for creation of capital assets through Grants-in-Aid to States, the ‘Effective Capital Expenditure’ of the Central Government is estimated at ` 10.68 lakh crore in 2022-23, which will be about 4.1 per cent of GDP.”

What budget documents says

Actual FY23BE capital expenditure provision is hardly any growth over FY22RE

The total capital expenditure of the central government includes four components – (1) Capital expenditure by central government department and ministries; (2) transfer to states for centrally sponsored schemes; (3)Loans to states; and (4) capital expenditure by the public sector enterprises through internal accrual, borrowings and budgetary support.

As per budget documents, the FY22BE provided Rs11.37trn for capital expenditure. As per FY22RE, the capital expenditure was lower at Rs11.05trn, as PSEs capital expenditure was revised down from Rs5.82trn (BE) to Rs5.02trn (RE) , a shortfall of Rs800bn.

Besides, the provision for transfer (Loans) to the state governments has been increased by Rs916bn from Rs218.18bn in FY22RE to Rs1.134trn in FY23BE.  It is pertinent to note that the state governments are allowed to borrow from the markets upto 4% of their respective state’s GDP. In past decade it had been a practice for state governments to borrow from the market and the central government’s loans were limited to very specific purposes.

Adjusted for loans to states, FY22RE capital expenditure is Rs10.83trn. This has been increased to Rs11.06trn, an increase of 2.1% only.

Transportation, Defense, BSNL 5G account for almost 72% of proposes capex

FY23BE provides 43.3% for transportation (Railways, Roads and Highways); 21.4% for Defense and 7.2% (mostly BSNL for 5G roll out).

As the former finance secretary Mr. S. C. Garg, highlighted in FY22 NHAI incurred a capex of Rs1.22trn in FY22. This investment was funded by Rs573.5bn budgetary support and Rs650bn borrowing and other resources raised by NHAI. FY23BE provides Rs1.34trn for NHAI. This means the government has substituted NHAI’s borrowings for capital expenditure. Thus, while the government account depict Rs636bn higher capex on roads in FY23BE, in fact the rise in actual capex may only be Rs120bn over FY22.

Besides, FY22BE provided Rs141.15bn for BSNL capex. However, FY22RE shows that the government did not provide any assistance for BSNL. FY23BE provides for Rs447.2bn for BSNL capex, the entire amount. This means like NHAI, BSNL may also be finding it hard to raise resources for their capex.

The green bonds proposed in the budget are primarily borrowings for PSEs like NHPC, NTPC, IREDA etc. to fund green energy projects. Earlier these entities used to borrow on their own books.

Given that there has been hardly any private capex in the roads sector in the past 7yrs, and now NHAI becoming dependent on the central government for all its capex, the quality of overall capex is likely to deteriorate only. The fall in overall PSE capex and failure of the government in disinvesting these PSEs is going to be a major challenge for the government.

Key sectors get nothing for capex

The finance minister said in her speech “For farmers to adopt suitable varieties of fruits and vegetables, and to use appropriate production and harvesting techniques, our government will provide a comprehensive package with participation of state governments.”

The budget allocation for capex on Food Processing is Rs ZERO.

Tourism has been one of the favorite sectors of our prime minister for growth and generating employment.

The budget allocation for capex on the tourism sector is Rs ZERO.

The finance minister said in her speech, “Implementation of the Ken-Betwa Link Project, at an estimated cost of ` 44,605 crore will be taken up. This is aimed at providing irrigation benefits to 9.08 lakh hectare of farmers’ lands, drinking water supply for 62 lakh people, 103 MW of Hydro, and 27 MW of solar power. Allocations of `4,300crore in RE 2021-22 and `1,400crore in 2022-23 have been made for this project.”

The budget allocation for Jal Shakti ministry is merely Rs4.2bn. This includes allocation for the ambitious Nal se Jal (Tap Water) program.

Electronics & IT (Rs3.9bn); Science & technology (Rs0.95bn); Agriculture (Rs0.4bn); Education (Rs 0.18bn); Renewable Energy (Rs0.12bn)  Sports (Rs0.05bn); etc. are some of the departments that get paltry allocations contrary to the government’s stated priorities.

Obviously markets are regretting their instant reactions to the budget.