Model code may not impact capex pace; less than Rs 1.5 lakh crore needed to meet FY24 aim

The revised capex aim for FY24 is about Rs 9.5 lakh crore

In February 2024, the government's capital expenditure more than quadrupled on a year-on-year basis and nearly doubled sequentially. With a spending of Rs 8.05 lakh crore during the first 11 months of the current fiscal, the Centre has met almost 85 percent of the revised target for FY24.

This means that the Centre needs to spend less than Rs 1.5 lakh crore or rather exactly Rs 1.44 lakh crore to meet the revised capex target of Rs 9.5 lakh crore for FY24.

To be sure, the Centre did lower its budget estimate for capital expenditure for FY24 of Rs 10.01 lakh crore by around Rs 50,000 crore. This was primarily due to lower-than-anticipated utilisation by states of the capex loan scheme for them. While Rs 1.3 lakh crore had been budgeted for the Special Assistance as Loan to States for Capital Expenditure scheme for 2023-24, the revised estimate for the same is Rs 1.06 lakh crore.

But the states seem to be stepping up spending on infrastructure as well.

The loans and advances (which largely include the loans given to the states) was 88.7 percent of the revised estimates of FY24 (Rs 1.4 lakh crore). The capex loans and their timely release has been instrumental in states also spending on capex, points out India Ratings and Research's Sunil K Sinha

and Paras Jasrai.

In fact, in the previous fiscal, loans and advances were much lower at 73.1 percent of the revised estimate of Rs 1.1 lakh crore.

Therefore, given that the government only needs to spend around 15 percent in March 2024 to meet the revised capex aim for FY24, meeting the target seems like a done deal.

However, according to ICRA's Chief Economist, Aditi Nayar, while there is expense of Rs 1.4 lakh crore left to be incurred in March 2024 to meet the full year target for capex this fiscal, slightly lower than the Rs 1.5 trillion recorded in March FY2023, this may be missed given the announcement of the model code of conduct (MCC) during the month.

Madan Sabnavis, Chief Economist at Bank of Baroda, however, believes that the government should be able to meet the revised aim set out for capex given that MCC norms do not have any material impact on ongoing projects, thereby letting the government  continue spending on infrastructure throughout March.

But Sabnavis does raise the issue of absorption capacity or whether there are enough infrastructure projects to spend on.

"Whenever you are looking at capex numbers of the government, you should keep in mind that the target may not be consciously met if there aren't enough projects to spend on. Also, because there is no compulsion to spend the money by March 31, it can always be moved to April, in which case it will be accounted for in the next fiscal," Sabnavis told Moneycontrol.

Capex target for FY25 set at new record of Rs 11.11 lakh crore, but FY24 aim missed

Since the pandemic, the Centre has been focussing on boosting expenditure on infrastructure in a bid to improve the quality of public expenditure. In fact, the push towards capex is expected to continue in FY25 with the government allocating Rs 11.1 lakh crore under it. While this is an increase of 11.1 percent from the current year's budget estimate, it is 16.9 percent higher than the revised estimate.

Even as the focus on capex continues, the government has warned that public capex cannot keep increasing as rapidly as it has in recent years since it is time for private expenditure to step in.