Union Budget 2019: Is capex recovery on the cards?

HYDERABAD: The NDA government’s first term, which presented six Budgets (including Interim Budget FY20 in February), among other achievements, appears to have got two things right, but had little luck on one critical component — capital expenditure. While the government managed to rein in subsidies and interest payments over the past five years, capex continues to be constrained by circumstances. For FY20 (IB), subsidies were pegged at 12 per cent of the total expenditure at `27 lakh crore, while interest payments accounted for 24 per cent.

On the other hand, the creation of capital assets across roughly 68 departments comprised a mere 7.2 per cent of total expenditure, which is nearly half the amount earmarked for subsidies alone. One may argue that capex will be high if one were to include part of the monies spent on centrally-sponsored schemes, but the uncomfortable fact remains that the amount of funds for productive asset creation is far lesser than desired. It remains to be seen if NDA II under Finance Minister Nirmala Sitharaman will make conscious efforts to raise the bar.

Incidentally, while subsidies and interest payments under UPA II were more or less similar — in FY14, subsidies comprised 13 per cent of total expenditure, and interest outgo stood at 22 per cent — capital expenditure, on the other hand reduced stood at about 9-11 per cent, but is now down to seven per cent.

This isn’t limited to central budgets alone. Even states seem to lagging behind on asset creation. A government assessment of states’ fiscal indicators during FY92 and FY14 found that though states increased the average capital outlay-GSDP ratio by 0.6 per cent every year, development expenditure grew only marginally.

The good news though is the steady decline in interest payments and subsidies. For instance, around 1991, interest outgo had the highest share of 29 per cent of total expenditure, while subsidies accounted for over 17 per cent. Following the 1991 expenditure strategy followed by FRBM implementation in 2003, subsidies and non-capital expenditure started declining. Given the huge debt, interest payments peaked to 36 per cent (of revenue expenditure) in 1995-96, but was pruned to 30 per cent in 2000.

Fearing a ‘debt-trap,’ the government resorted to debt swap schemes, debt consolidation and relief facility, due to which interest payments eventually reduced to sub-15 per cent as prescribed by the 12th Finance Commission. However, the 2003-08 boom period saw high expenditure, debt and deficit, spiking interest payments yet again and now hover around 22 per cent.