Budget 2024 | Govt capex growth likely to slow down to 10% in FY25

Budget 2024: In 2023-24, the Centre had budgeted for a capital expenditure of Rs 10 lakh crore – 33.4 percent higher than the budget estimate for 2022-23.

The government's capital expenditure may witness a significant slowdown in 2024-25, with a Moneycontrol survey of 15 economists suggesting that this week's interim budget may allocate around Rs 11 lakh crore for the same.

To be sure, a capex target of Rs 11 lakh crore for the next year would still represent a new all-time high. However, it would only be around 10.3 percent higher than the budget estimate of Rs 10 lakh crore for the current financial year which, in turn, was a huge 33.4 percent higher than the budget estimate for 2022-23. The capex growth slowdown in seen as being key to the government's effort to cut its fiscal deficit to achieve the medium-term objective of 4.5 percent of the GDP by 2025-26.

According to economists, the government may revise down its capex for the current financial year by around Rs 30,000 crore to Rs 9.7 lakh crore. As such, a budget estimate of Rs 11 lakh crore for 2024-25 would represent an increase of 13.4 percent over the revised estimate.

"Based on our estimates of receipts and revenue expenditure, we think this fiscal deficit target would allow for a budgeted capex of Rs 10.2 lakh crore in 2024-25, implying a relatively sedate year-on-year expansion of around 10 percent, compared to over 20 percent expansion seen in each of post-Covid years," analysts from ratings agency ICRA said, adding that "higher amount of capex would impinge on the Centre's ability" in meeting the fiscal deficit target for 2025-26.

Even at Rs 11 lakh crore, the Centre's capex push would remain firm. However, there have been indications for some time that the pace of capex growth has to slow down. In fact, Chief Economic Adviser V Anantha Nageswaran had warned in the run-up to last year's Budget that public capex cannot keep increasing as rapidly as it has in recent years for two reasons: it may not be necessary as private capex steps up and continued strong growth in public capex could push up the cost of capital.

There are already signs that capex growth has started to cool, which is why economists see the Budget estimate of Rs 10 lakh crore being missed.

"On a six-month rolling sum basis, capex growth has moderated from 50.7 percent to less than 9 percent," noted Nomura economists Sonal Varma and Aurodeep Nandi.

As per latest data, the Centre has fallen behind the run-rate needed to meet its capex target, with the figure for April-November 2023 standing at Rs 5.86 lakh crore, or 58.5 percent of the target.

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Keeping with past trends, the capex allocation for next year will likely be dominated by defence, railways, and roads and highways. Further, the allocation for the Scheme for Special Assistance to States for Capital Investment – or long-term, interest-free capex loans for states – may also be raised from Rs 1.3 lakh crore this year. However, states are lagging when it comes to utilising this scheme.

"We expect states to fall short by Rs 20,000-30,000 crore in availing this facility. Thus, even with higher allocation next year, states' capacity to undertake more capex and infra spending may be nearing their limit," Madhavi Arora and Harshal Patel, economists with Emkay Global Financial Services, noted.