Should the Budget have set a higher capex target?

capex

The final budget while optically keeping its capex for FY25 unchanged at Rs 11.1 lakh crore, has many facets wherein the capex has actually increased. Before that, we need to understand that the interim capex outlay itself is a 17 percent YoY increase versus FY24. Such a large increase in capex is notable. Therefore, the need for further increase is not warranted within three months. It is necessary to understand that the final budget should be looked as an increment rather than an absolute. However, the final budget does present several areas of capex thrust.

First, within an increased revenue spending the allocation is for increased support for states for capex (especially Andhra Pradesh & Bihar) for infrastructure projects, renewable energy, urban development, and affordable housing which in aggregate is over Rs 40,000 crore. The allocation to Andhra Pradesh and Bihar noticeably is for large projects with funding planned from external sources in addition to central government budget support. This should augment budgeted spend.

Next, additional allocation from PSU capex largely HUDCO which is again for urban development is over Rs 25,000 crore. The aggregate capex spend to GDP therefore rise to 4.5 percent versus 4.3 percent in the interim budget including PSU capex. This ratio is perhaps the highest so far in the decade. This has to be looked in context of moderating revenue expenditure and focus on fiscal consolidation as well. Noticeably, fiscal consolidation is coming without any growth sacrifice which is a huge positive for growth and consolidation.

Furthermore, the additional grants for employment support for youth (Rs 10,000 crore), and the target schemes for MSME and manufacturing via credit support and credit guarantee is also aimed to spur private capex. There are several announcements in the budget that are capex oriented – to name a few viz. infrastructure parks, shipping, critical mineral mission, digital public infrastructure, IBC reforms, transit development plan for large cities, creative development of cities, street markets, policies for energy security are aimed at public-private partnership for medium to long term investment.

In addition, efforts aimed to simplify tax regime and increase confidence among taxpayers will go a long way in the ease of doing business. Rationalising tax structure and increasing the slab rates within the new tax regime of income tax will help boost consumption. In summary, capex need not be explicit all the time. This budget has more than many ways for a large implicit capex boost. In summary, India is not shying away from capex, but rather setting the stage for structural capex trends. The stage is set for structural long-term growth and rating upgrades down the road!

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