Central Government’s Capital Expenditure Strategy Amid Post Covid-19 Disruptions: An Analysis

The Central government has been on a spending spree, pumping in funds worth Rs 22.77 lakh crore towards capital expenditure between FY22 and FY24 in a bid to revive the economy post the Covid-19 disruptions. This massive allocation has caught the attention of India Inc and policy watchers, making it one of the most sought after figures in the budget.

Finance minister Nirmala Sitharaman announced a whopping Rs 11,11,111 towards the Centre’s capital expenditure for the current financial year in the interim budget. This allocation is expected to increase further when the full year Budget is tabled in mid July, thanks to tax buoyancy and dividend bonanza from the Reserve Bank of India.

While the numbers may seem impressive, a closer look reveals some concerning trends. The share of Central capex in the Gross Domestic Product (GDP) remains low, with the current level of Gross Fixed Capital Formation (GFCF) in the economy below the desired levels. Additionally, there is a heavy concentration of spending in the highways and railways sector, raising questions about the diversification of the government’s capex portfolio.

Infrastructure sector experts believe that for the multiplier effect of government spending on capital assets to kick in, the expenditure should ideally be around 5% of the GDP. However, the current allocation falls short of this target, indicating a need for increased focus on infrastructure development in other key sectors as well.

The Modi government’s emphasis on infrastructure spending gained momentum in the wake of the Covid-19 pandemic, with a total commitment of Rs 33.88 lakh crore towards public infrastructure projects from 2021 onwards. However, the disproportionate allocation towards railways and highways highlights the need for a more balanced approach to infrastructure development.

Moving forward, it is crucial for the government to explore funding models that attract private sector investments in infrastructure projects. Embracing more Public-Private Partnerships (PPPs) and focusing on areas like housing, energy transition, urban and rural connectivity, and manufacturing will be key to driving sustainable economic growth.

As the government continues its push towards infrastructure development, a strategic combination of fiscal support, PPPs, and policy initiatives will be essential to ensure a more inclusive and diversified approach to capital expenditure in the coming years.