Capex: Why Budget 2017 cannot provide a complete solution: Financial Express 21st January 2017

It is normally argued that the role of the government is to spend on infrastructure, and as a corollary, the Budget should cut down on non-productive expenditure and focus more on development of roads and Railways. In his Budget 2016 speech, the finance minister stated that a total R2.18 lakh crore was to be spent on roads and Railways. How should one read these numbers, considering this amount does not feature in the capex plan provided in the Budget?

Budget 2016 had an outlay of R17.29 lakh crore for the central sector—the balance is for states and UTs. Of this, total capex was R2.32 lakh crore, or 13.4% of aggregate allocations. This is quite low, thanks to the preponderance of revenue commitments that constitute over 85% of the expenditure of the government.

Further, the break-up of the capex across industries is interesting. The largest allocation, at R0.79 lakh crore, is for ‘defence services’ while another R0.12 lakh crore was earmarked for ‘defence’—their combined share in the overall capex was 39%. This expenditure is not necessarily on account of domestically procured goods; the import bill would also be a part of this. Add to this the capex of the financial services division, R0.28 lakh crore, and the combined share crosses 50%. The bank capitalisation expense as well as support for the MUDRA Bank would be subsumed in this outlay.

Hence, half of the capex is in either defence or strategically-defined sectors in view of the goals of recapitalising the banks. More specifically, three sectors within the infra space are dominant, after defence, of course—roads (R0.18 lakh crore), urban development (R0.12 lakh crore) and Railways (R0.45 lakh crore). Hence, a little less than a third of the total capex goes for infrastructure from the Union Budget outlays. Then, how does the R2.18 lakh crore figure for infra spend fit in here?

The balance is that which is raised by relevant PSEs through means such as Internal accruals (around 33% of total raised through external sources), Bonds and debenture issuance (47%), ECBs (5%) and ‘Others’ (15%)—collectively called IBEO. This amount is quite significant, and is indicative of the efforts made by the PSEs. It is also outside the Budget allocations. Further, as PSEs are commercial enterprises, their functioning has to be similar to how private sector companies operate.

In FY17, for instance, all PSEs together would be deploying R3.98 lakh crore garnered from IBEO sources—almost 70% more than what the government allocated in the Budget for investment purposes. But all this funding is on commercial terms when borrowings are involved. While bonds are raised in the corporate debt market, the internal accruals would be a broad proxy for profits that are not paid out as dividend.

The other interesting feature of these allocations of expenditure of various ministries is the dominance of revenue expenditure. Hence, while roads and highways have an allocation of around R47,000 crore, R17,600 crore is capital expenditure and the balance is towards the revenue account. Even in case of rural transport & roads and development, that are on the state list, the entire expenditure is on revenue overheads (a sum of R89,000 crore).

Hence, when piecing together the amount that is being spent on infrastructure, it is essential to separate what the government spends from the Budget and the exogenous revenue raised by the concerned public enterprise for building infrastructure. Clearly, the bulk of the funding is from sources outside the budget. Curiously, the largest spending (as shown in the accompanying table) is from petroleum companies even though this does not get highlighted in the Budget.

Further, even the allocations made to various ministries are heavily skewed towards the revenue account. The message here, thus, is that the Budget does not really have the means to provide a big bang momentum for infrastructure, given the constraints of committed expenditure (interest, subsidies and other social schemes). The adherence to FRBM target and the resulting fiscal deficit constraints limits what the government can do.

There are three thoughts here. The first is that if the government has to be really active on capex and provide a thrust to the economy, there has to be some additional spending earmarked for this purpose. This would have to be linked either to a specific revenue component or to the GDP in terms of fiscal deficit. A benchmark of an additional 0.5% of GDP, working out to R75,000 crore, which gets added to the fiscal deficit could be an option. If such an amount is spent decisively for five years, the end result will be effective. For FY18, the additional revenue flowing from the income disclosure schemes could be a source that could be tapped for providing the necessary thrust to growth.
The second thought is that the private sector has to play an equally important role in bolstering infrastructure. The government can contribute to, but certainly can’t drive, the entire campaign to build infrastructure. The government’s endeavours in easing doing business has been quite remarkable in the last two years. With the GST, bankruptcy laws, corporate debt market development framework, congenial monetary policy, etc, providing a good platform, the final investments have to come from the private sector. Or else, it would just take much longer to fill the infra gaps.

The third idea is that states and local governments, too, have to pitch in and provide resources for infrastructure building in areas like urban infrastructure, roads and agriculture markets as these would be outside the domain of the Union government. True, for building smart cities, the Centre is providing support, but there has to be corresponding contribution from the states.

Hence, one must be abstemious in her expectations from the Budget with regards to what is allocated for infrastructure. This is a large exercise where several constituents across various levels of government as well as the private sector must get involved to take things forward. The Budget 2017 cannot provide a complete solution.