MC Interview: Centre can't keep hiking capex by 25-30% each year, says Expenditure Secretary Manoj Govil

The capital expenditure target for the current financial year was reduced to Rs 10.18 lakh crores from Rs 11.11 lakh crore earlier.

Govil, in an exclusive interaction with Moneycontrol, spoke on a range of issues from the fiscal implications of the 8th Pay Commission to the chances of a rating upgrade.

Below are the edited excerpts of the interview with Govil:

The slowdown in the pace of growth in capital expenditure for FY26, is this also a message to the private sector that it is time for the private sector to do the heavy lifting now when it comes to capex?

So as far as capex is concerned, last year it was at Rs 9.49 lakh crore, it was achieved. So this year when the target was set, it was set at 11.11 lakh crore. But because of the election-related activities, the actual expenditure in the first four months was not commensurate with this target. In fact, not only us but the state governments also, their capex also was down during these four months. As a result, now we are looking at a revised estimate of Rs 10.18 lakh crore, which is around a 7-percent growth as compared to the initial Budget estimate. Next fiscal year though, we are aiming Rs 11.21 lakh crore, which is a 10 percent increase.

The total expenditure from revised estimate this year to the next year's Budget estimate is increasing by 7.4 percent. So total expenditure is going up by 7.4 percent. However, capex is increasing by 10 percent. So one could argue that the focus is still on capex because there are two components.

Now, the capex happens in two ways. One is the direct capex, which I mentioned. Other is the grants to the states, which we count for accounting purposes as revenue in our accounts -- revenue grants, but it results in creation of capital assets. For example, Jal Jeevan Mission, Pradhan Mantri Gram Sadak Yojana, these lead to the formation of capital assets at the ground level, but for accounting purposes, we count it as a revenue expenditure. If you count those kinds of expenditure also, then the current year's revised estimate for pure capex plus revenue grants for capex together is not Rs 10.18 lakh crore, but Rs 13.18 lakh crore, which is going up to Rs 15.48 lakh crore next fiscal. This is also under the same envelope of the Government of India expenditure.

So the money that the Government of India is providing either directly to its agencies as capex or to the state governments, which will be used for capex, the total increase of size is 17.4 percent. Now, the Government of India budget is only going up on an aggregate basis by 7.4 percent, whereas the capex part and the grants for capex part added together is increasing by 17.4 percent. So you come to this realisation that capex has been prioritised in the Budget for next year as well.

Post-COVID, the central government's capex has been doing the heavy lifting, making growth rates quite sharp. So it was bound to slow down. And second, another point is being made, obviously under the federal structure, the central government is spending on defence, railways, highways, telecom, and a few other areas. So, the scope is limited as well. What would be your views on this?

Increasing capex allocation by 25-30 percent every year is not sustainable. At some point, you will hit the ceiling. Because again, as I said, there are two parts, the revenue part and capex. If the aggregate is increasing by 7 percent or 10 percent, you can't have one component increasing by 30 percent every year. So that's not feasible.

In the long run, one would probably expect that both revenue expenditure and the capital expenditure will grow at the same rates. Or maybe a little bit more on the capex, but not too much of an increase. So that has also a linkage with the aggregate increase in the total expenditure. And the aggregate increase in total expenditure also has a linkage with, first of all, the revenue recoveries, the taxation and non-taxation, the revenue receipts on that side, as well as the policy for fiscal prudence. We also have to remember that this has been done. So a 17-percent increase has been budgeted in FY26 versus the revised estimate of this year at a time when the aggregate fiscal deficit is going down by 0.4 percent to 4.4 percent.

How are you managing to keep a lid on your fiscal deficit?

Before the COVID time, in 2018-19, the fiscal deficit was 3.4 percent. Then it rose to 4.6 percent in 2019-20, that is pre-COVID again. Post-COVID or during COVID times, it suddenly rose to 9.2 percent. So 9.2 percent of the whole GDP being taken over by the Government of India as loans or borrowings in some sense, is not a healthy situation. And therefore, the Finance Minister at that time said that we will come back to a position of less than 4.5 percent by 2025-2026. And that fiscal consolidation path has been maintained. But going forward, I think the emphasis now is not so much on fiscal deficit, but more on reducing the debt-to-GDP ratio, which now is 57 percent and we hope to reach around 50 percent, plus, minus 1 percent in the next few years.

This 50 plus, minus 1 percent debt-to-GDP ratio glide path, where would that bring the fiscal deficit to by 2031? And are you looking at a percentage or a range in terms of fiscal deficit?

So the debt path is clear. But even the debt path, it visualises different paths. It is like moderate or more extreme or mild. So it will depend upon how the situations evolve in the future. But a target has been set. Ideally, we would like it to be 50 plus, minus 1 percent. But the fiscal deficit can in some years be slightly higher, slightly lower. That is left unsaid. What is said is that the central government will come to 50 percent.

The FRBM initially had a 3 percent target for fiscal deficit and a 40 percent debt level. So is that irrelevant now?

As far as 40 percent is concerned, there is no plan to go back to 40 percent immediately. Now the plan is to target 50 plus, minus 1 percent over the next few years. And the fiscal deficit may vary from year to year. Sometimes it could be higher, sometimes it could be lower. But then the peg… So how do we say that we are on the path? We will say we are on the path if we are on a declining path. And the decline seems consistent with going to 50 plus, minus 1 percent. So that is the way we will evaluate the policy of fiscal consolidation in the future. Which also means if, for example, there is a higher GDP growth, the fiscal deficit could also be higher. If the GDP growth is higher. Let us say GDP growth is 15 percent. Suddenly you can have more fiscal deficit, you can borrow more, but still be on the path. But if the GDP growth is lower, let us say 7 percent, then the fiscal deficit becomes very important, because you will have to keep the fiscal deficit low to be on the path.

In terms of allocations, is there a sense that the absorption capacity has not kept pace because there has been a sizeable difference between the Budget estimates and revised estimates?

No, I wouldn't say that. I think it is less to do with the capacity of the departments and more to do with the election-related activities, which took away three to four months. Because, as I said, this is also the case with the state governments. So everybody having a lack of capacity all at the same time does not seem feasible. And in fact, we have a 50-year scheme for loans. And one component of that scheme in the present financial year was that if certain state governments increase their capital expenditure for the H1 of the current financial year by 10 percent or more as compared to the H1 of the previous financial year, then the incentive amount will be given. So a number of state governments they couldn't do much in H1 due to election-related activities and wanted relaxations, we have given them the relaxation. The difficulty in carrying out the expenditure, especially on the capital side, was felt not only by the central government agencies, but also by the state governments.

Do we need to attach less conditions to the capex-linked loans provides to the states to spur utilisation?

So the current year, we have Rs 1,50,000 crore as the scheme, of which Rs 55,000 is unconditional based on the 15th Finance Commission’s devolution ratio. And the remaining Rs 95,000 is tied to certain reform activities, parameters, and indicators . The conditions are not stopping states from spending on capex. In the previous year also, we had certain conditions, but the untied part was a larger part. This year the untied part is Rs 55,000, last year it was probably around Rs 80,000 crore or so.

So one could say that the last year the spending should have been higher, but it was Rs 1,09,000 crore on this scheme. The preliminary figures till January end for this financial year, shows that we are already close Rs 1,09,000 crore, which was the aggregate spending in that year for 12 months. We still have two more months. And that is why we have put the revised estimate at Rs 1.25 lakh crore. We could the revised estimates by Rs 5,000, Rs 10,000 crore. In the month of December, we had given them more relaxation. So we hope that it will pick up. But what I am suggesting here is that even with more items tied to reforms, the actual expenditure this year is going to be higher than the actual expenditure last year when there was more untied and less tied. So it is a good thing to nudge the states towards certain reforms.

One of the reforms, for example, was this SNA system. Now we have a new reform called SNA Sparsh, which essentially means that the money is kept with RBI and is taken out of the state government and central government accounts only when it is finally spent, which means when the payment is made either to a beneficiary or to a vendor who is entitled to the payment. We have this issue that sometimes the money is given to the agencies, they keep it in the bank account. They don't spend it. So from our Budget, it is shown as spent, but it is there in the bank account.

The idea here is that this is a valuable thing to monitor that just because money has left the treasury, has gone to the bank account, it is not booked as expenditure. We are also looking to see if it has left the bank accounts as well. Has it gone to the final beneficiary? For Pradhan Mantri Awas Yojana, the beneficiary is an individual. So the money should go from the SNA account to the individual's account.

What about the impact of the 8th Pay Commission?

So the Pay Commission, the government announced recently and we have now written to the major ministries which is the Defence Ministry, the Home Ministry and the DOPT to suggest the terms of reference. They will suggest the terms of reference. Then the government will finalise the terms of reference. Then the commission will start functioning.

So in the previous years, the commission has taken more than one year to present the report. If the commission is set up, let us say even in the month of March, the report and if it takes let us say 12 months, it could take less depending on the terms of reference. The terms of reference may also prescribe a lower time for the commission to present the report but going by the historical record.

So even if it submits the report by March 2026 or April 2026, the budgeting time will be over and this financial year will also be over. So as far as this financial year is concerned, we do not expect any impact of the recommendations of the 8th Pay Commission on this. But yes, next year it will have to be taken into account. The cost to the government will depend upon what the recommendations. We have some information about what the 7th Pay Commission did. But each commission is different. The conditions which confront each commission is different. So it will be for the commission to take a call.

So let us say if the commission's recommendations are accepted even in FY27, it is possible that some of the recommendations may be given effect from the 1st January of 2026. For those three months, which will be in the FY26. But then that will be the arrears that can be rolled over to next financial year. Last time too, arrears were paid subsequently in the next financial year. But in the current financial year, even though it is possible that some of the recommendations may apply from the 1st of January 2026, but the financial impact will come only in 2026-27.

With your decision to link fiscal deficit to your debt-to-GDP glidepath, do you expect a better showing from ratings agencies?

Ratings agencies decide based on a number of different aspects and the fiscal deficit is only one parameter. They also compute debt to GDP ratio. They also base it on the composition of debt, levels of foreign currency and local currency. They also look at when is it to be paid, is it like equally distributed over the years, what is the tenure of the debt, so various other conditions. Then the growth prospects. So there is no single parameter. And as I said, this will be in the Budget documents, So it is not that the mention of fiscal deficit will go away.

But would it spur a rating upgrade for you now that you are focusing on debt to GDP instead of just fiscal deficit?

I don't know. It is too early to say. Generally, the rating agencies do come to the Ministry of Finance and they do hold talks. But I don't think that just the mere fact that we have now changed the focus from fiscal deficit number to declining path of debt to GDP, that would be sufficient to sway them one way or the other.

Expenditure has been kept pretty tight in order to kind of ensure that we give a boost to consumption. Outlays may not have dropped, but they have not significantly jumped either. Going ahead, is there room to increase spending?

Generally, one would say that the government needs to come in and increase the expenditure if the government thinks that there is not enough private investment, not enough expenditure on the private side and if the economy is in a downturn and certain fiscal support is required. So, we do not think we are in that kind of a situation right now. We were in that kind of a situation when COVID occurred. Suddenly, the revenues dropped. Suddenly, private activities dropped. We had to do much more higher expenditure on food and other health activities.

And as a result, as I said, at that time fiscal deficit had gone to 9.2 percent. And the government did support the economic activity, but gradually we have come back to the normal path. And this also increases the resilience of the fiscal setup. So, should there be any unexpected events in the future, near term or medium term future, we will have built in fiscal buffers to become more robust to such activities and if necessary undertake any fiscal steps.

So, would FY26 be the year that private investment comes back?

So, that is the hope. The hope is that private investment catches up and there are a number of steps in the Budget to facilitate that. Basically, reforms around regulations, encouraging MSMEs, startups, among others. So, the idea is that while the government is carrying out the capital expenditure, the private sector also has to step up.

Have you factored in the fact that Donald Trump has already increased tariffs for Canada and Mexico?

No. And even for this, how much of uncertainty is there in the actions of another foreign government, that still needs to be looked at now. That is something which is still in the speculative frame.