Interim Budget 2024: The Great Capex Push

Capex on the rise: “The very things that hold you down are going to lift you” is a famous dialogue from Disney's 1941 animated feature film, Dumbo.  When seen in the Indian economic context, anyone who has closely watched the economy will say that less allocation to Capex and higher allocation towards subsidies during the UPA regime sort of held back the Indian economy. They will also agree that bumper allocation to Capex by the current Modi government has lifted the economy, on the growth path even in the worst scenario, leading to some green shots in private Capex, which was long subdued.

“There has been some pick-up in private Capex indicated by improvement in fixed asset to total assets of listed companies in FY24. However, the government, both Centre and states remain the key drivers of Capex cycle, with front-loading of capital expenditure,” Gaura Sen Gupta, Chief Economist, IDFC Bank, told Republic Business.

Capex has been the key driver of growth as far as the Indian economy is concerned in the last few years. Capex is nothing but expenditure that the government incurs in the creation of assets, these projects have long gestation periods and lead to job creation.

In the past few years, the thrust on Capex was quite evident. The share of the government’s capital expenditure in total expenditure has increased from 12.3 per cent in FY18 to 22.4 per cent in FY24 (BE). The central Capex has sharply risen from Rs 1.6 lakh crore in FY11 to Rs 1.9 lakh crore in FY14, and finally Rs 10 lakh crore in FY24.

“Capex has risen drastically under the government and in the last budget the effective Capex was at 13.5 lakh crore which is budgeted as 4.5 per cent of GDP, and that has led to crowding-in of investments,” NR Bhanumurthy, Vice Chancellor of BR Ambedkar School of Economics, told Republic Business.

The Capex push has been a part of the government's efforts to make India a $5 trillion economy, which will in turn lead to an increase in Gross Fixed Capital Formation (GFCF), which is seen as a proxy for investments in the economy.

But it has three parts to it- households, government, and corporate. The recent increase in capital expenditure of the government is reflected in an increase in GFCF. GFCF as per cent of GDP stood at 34 per cent in FY23, the highest since FY14.  It is the government that is driving the major Capex push, however, the impact of it is seen in picking up private Capex.

Even Finance Minister Nirmala Sitharaman belongs to a school of thought which believes Capex is going to have a multiplier effect on the economy leading to a crowding in of private investments eventually. Sitharaman, while presenting a budget a few years back, said that when you do capital expenditure for every rupee that you spend approximately Rs 2.95 is what you will get as a multiplier.

A study by the National Institute of Public Finance and Policy highlighted that every rupee spent on Capex leads to a cumulative multiplier effect of Rs 4.8 on the economy, while for the revenue expenditure, every rupee of outlay leads to a cumulative multiplier of Rs 0.96.

Also, Morgan Stanley, in its report titled ‘How India has transformed in less than a decade’, featured that the steady increase in manufacturing and Capex as a percentage of GDP is likely to result in a new cycle in manufacturing and Capex.

It has estimated the share of both in GDP to rise by approximately 5 per cent by 2031. So far this year, the public Capex has performed well. Till August, the Centre’s Capex has seen a promising growth of 48.1 per cent YoY.

State Governments Capex Push

It's not only the central government that is doing heavy expenditure on Capex, the state governments have also budgeted for strong capital expenditure, with the aggregate budgeted Capex for 19 major states at Rs 7.8 trillion – 19.6 per cent higher than the budgeted Capex of last year. However, unlike last year, the state Capex has maintained its momentum with the April-August period witnessing a growth of 45 per cent as compared to last year.  The Centre’s disbursement of conditional interest-free loans tied to actual Capex spending has aided in the rebound of the Capex cycle by states.

Private Capex

Realising the importance of private investment in accelerating economic growth, the government has been making various attempts to boost investment by the private sector.

Research by CRISIL highlights that the industrial investment by the private sector between FY18 and FY22 registered a compounded annual growth rate (CAGR) of 7 per cent. According to experts and analysts, the capacity utilisation in the manufacturing sector is now above its long-run average. This simply means the manufacturing sector needs additional capacity. As per RBI’s Order Books, Inventories and Capacity Utilisation Survey, capacity utilisation (CU) in the manufacturing sector increased for the third successive quarter to 76.3 per cent in Q4 of FY23 from 74.3 per cent recorded in the previous quarter.

“Centre as well as state government have pushed Capex massively, private Capex also picking up though there has been a delay in that which is resulting in all this questioning as to when exactly is the private Capex going to pick up,” Rajani Sinha, Chief Economist of CareEdge told Republic Business.

According to her, new investment projects kind of indicate intent to invest by the private sector which had jumped up in the quarter before. “Broadly we are seeing indications of private Capex building up because capacity utilisation level has also reached above the long-term average,” Sinha added.

According to I-Sec Research, listed corporate Capex has sharply risen from Rs 5.9 lakh crore in FY11 to Rs 8.5 lakh crore in FY23. As per the data released in National Accounts Statistics 2021-22, GFCF by the private sector rose from Rs 17.4 lakh crore in FY18 to Rs 23.7 lakh crore in FY22. Multiple high-frequency indicators and industry reports point towards the emergence of green shoots in private Capex upcycle.

Even though higher interest rates make companies stall their expansion plans the hope of private Capex revival is high at this juncture