Capital Expenditure Increase in Budget 21-22 Is an Optical Illusion

 

BUDGET 2021-22

HIGHER CAPITAL EXPENDITURE IS OPTICAL ILLUSION

 

Subhash Chandra Garg

Economy, Finance and Fiscal Policy Strategist; Former Finance Secretary, Government of India

 

 

Finance Minister highlighted, in her budget speech, a massive increase of 34.5% in the capital expenditure budget estimates of year 2021-22 (BE21-22) to Rs. 5.54 lakh crore from Rs. 4.12 lakh crore in the budget estimates of 2020-21 (BE20-21). The revised estimates (RE20-21) of capital expenditure for the FY20-21 have also gone up to Rs. 4.39 lakh crore, recoding an increase of 6.55%.

 

An increase of Rs. 27,078 crore in the capital expenditure in the RE20-21 in the covid-19 and lockdown impacted year when the GDP is likely to see a contraction of 7.5-9.0%, even though it is only 2.57% of the increased fiscal deficit of Rs. 10.52 lakh crore, should be a cause of celebration for sound fiscal management (theory: capital expenditure is better fiscal expenditure) and imparting right investment stimuli (assumption: capital expenditure is the investment in growth) to the economy.

 

Unfortunately, the capital expenditure headline number of Rs. 4.39 lakh crore in RE20-21 is an optical illusion.

 

Reality of Capital Expenditure in RE20-21

 

Provision for capital expenditure, in excess of Rs. 500 crore, has been made in the RE20-21 for 18 Ministries and Departments. Provision, in excess of Rs. 5,000 crore, has been made for 10 Ministries and Departments and, in excess of Rs. 50,000 crore for 3 Ministries and Departments. The three demands, Capital Outlay on Defence Services (Rs. 134,510 crore), Ministry of Railways (Rs. 108,398 crore) and Ministry of Road Transport and Highways (Rs. 92,053 crore) account for Rs. 334,961 crore of the capital expenditure, which is 76.3% of the total RE provision of Rs. 439,163 crore.

 

The Ministry of Railways had the capital expenditure provision of Rs. 70,000 crore in BE20-21. In the RE20-21, it has gone up to Rs. 108,398 crore, an increase of Rs. 38,398 crore. Total increase in the RE capital expenditure budget of Rs. 27,078 crore is lower than the increase in RE capex budget of Railways. This means that while the capital expenditure of the whole of the Government in FY 2020-21 has reduced, railways’ capital expenditure has increased!

 

A closer scrutiny of capital expenditure of Railways for FY 2020-21, however, reveals large revenue expenditure disguised as capital expenditure which creates the optical illusion of higher capital expenditure in FY2020-21.

 

Capital expenditure, under all the regular heads of Railways for FY2020-21, has heavily under-performed during the year. Capex for the new lines’ construction has reduced from Rs. 12,000 crore to only Rs. 929 crore, for gauge conversion from Rs. 2,250 crore to Rs. merely Rs. 26 crore, for rolling stock from Rs. 5,787 crore to Rs. 2,004 crore, for track renewals from Rs. 10,599 crore to nil and so on. However, the Government from General Budget gave a ‘Special Loan for Covid Related Resource Gap’ of Rs. 79,398 crore to Railways to provide liquidity support to railways to meet its losses in the current year and also for ‘liquidating adverse balance in the public account’ of Railways for the year 2019-20.

 

If the ‘capital expenditure’ of ‘Special loan for Covid related resource gap’, which is a spurious capital expenditure, is eliminated from the capital expenditure provision of Rs. 108,398 crore in the RE, the actual capital expenditure of Railways for FY20-21 comes down to only Rs. 29,000 crore. Excluding the provision of the Special Loan of Rs. 79,398 crore brings down the RE20-21 capital expenditure to Rs. 359,765 crore from the BE20-21 provision of Rs. 439,163 crore. There is another loan item of Rs. 12000 crore, which has also added to the capital expenditure of the centre. Loans of Rs. 12,000 crore have been given to the States under the budget head Transfer to States. Excluding this item, the real revised capital expenditure estimate comes down to Rs. 347,765 crore only. These two eliminations make the capital expenditure in RE20-21 Rs. 64,320 crore less than the BE20-21, resulting into an actual reduction of 15.6% in the capex for FY20-21.

 

The reduction in capex provision of RE20-21 is spread over all the Ministries and Departments. Major capex budget cuts have been made for the real capex expenditure in Department of Atomic Energy (from Rs. 9,345 crore to Rs. 5,962 crore), Department of Promotion of Industry and Internal Trade (from Rs. 1,469 crore to Rs. 797 crore, largely reflecting lower requirement of PLI scheme), Department of Telecommunications (from Rs. 25, 675 crore to Rs. 4360 crore, largely for lower capex relating to revival of MTNL and BSNL), Department of Higher Education (from Rs. 2,227 crore to Rs. 229 crore), Department of Police (from Rs. 9,846 crore to Rs. 5,191 crore), Ministry of Housing and Urban Affairs (from Rs. 21,149 crore to Rs. 10,309 crore), Ministry of Power (from Rs. 1,082 crore to Rs. 384 crore), and the Department of Space (from Rs. 7,775 crore to Rs. 4,545 crore).  In the Department of Economic Affairs, a lump sum provision of Rs. 22,050 crore was made in the BE20-21 for Support for Infrastructure Pipeline, which has also been reduced to Rs. 7,810 crore in RE20-21. In the case of Ministry of Urban and Housing Affairs, a provision was made in BE20-21 of Rs. 17,492 crore for capital support for Metros which has largely remained unutilised and has been reduced to Rs. 6,484 crore in RE20-21.

 

Expenditure Stimulus in BE21-22

Total expenditure through the budget of Government of India in RE20-21 is Rs. 34.50 lakh crore. Total expenditure through the budget for BE21-22 is Rs. 34.83 lakh crore. It represents an increase of Rs. 33,000 crore in budget expenditure. As there are no current off-budget public expenditures now, either in RE20-21 or BE21-22, this amounts to a princely increase of .96% in the budgetary expenditure push.

Public expenditure through resources of public enterprises is Rs. 6.45 lakh crore in RE20-21 and Rs. 5.83 lakh crore in BE21-22. There is a reduction of Rs. 62,000 crore in the resources of public enterprises for the year 2021-22, which largely represents capital expenditure through public sector and public authorities. This reduction amounts to 9.6%.

Total expenditure through budgetary resources and the resources of public enterprises is budgeted to go down from Rs. 40.96 lakh crores in RE20-21 to Rs. 40.66 lakh crores in BE21-22, a marginal reduction of less than one percent. At the aggregate level, there is no fiscal expenditure push in FY21-22.

Capital expenditures for FY21-22, however, have been increased from Rs. 4.12 lakh crore in BE20-21 to Rs. 4.39 lakh crores in RE20-21 and to Rs. 5.54 lakh crores in BE21-22. Increase in BE21-22 over the RE20-21 is Rs. 1.15 lakh crores, which represents an impressive increase of 26.2%. This implies a corresponding reduction in demand push represented by revenue expenditure as overall expenditures are not rising. However, as investment push, provided through the capital expenditure, is better, let us see where the capital investment push has been directed to.

Major increases have been provided for in the budget of Ministry of Road Transport and Highways (from Rs. 92,051 crore in RE20-21 to Rs. 108,230 crore), Ministry of Housing and Urban Affairs (from Rs. 10,309 crore to Rs. 25,759 crore), Department of Financial Services (from Rs. 13,650 crore to Rs. 25,800 crore) and the Department of Economic Affairs (from Rs. 17,943 crore to Rs. 56,607 crore). For Railways, which has a very large capital budget, there is no increase as Rs. 1,07,100 crore have been budgeted against RE of Rs. 1,08,398 crore. Likewise, the capital outlay of Defence has also seen marginal increase (from Rs. 134,510 crore to Rs. 135,071 crore).

Other significant increases in the capital expenditure (more than either Rs. 200 crore or 10% over RE 2020-21) have been budgeted for the Ministries/Departments of Atomic Energy (Rs. 9,876 crore against Rs. 5962 crore), Department of Promotion of Industry and Internal Trade (Rs. 1,202 crore against Rs. 797 crore), Department of Telecommunication (Rs. 25,936 crore against Rs. 4,360 crore), Defence Services (Rs. 1,35,061 crore against Rs. 1,34,510 crore), Ministry of Electronics and Information Technology (Rs. 446 crore against Rs. 353 crore), Department of Police (Rs. 9,712 crore against Rs. 5191 crore), Department of Justice (Rs. 1100 crore against Rs. 286 crore), Ministry of Power (Rs. 1565 crore against Rs. 384 crore), Department of Social Justice and Empowerment (Rs. 370 crore against Rs. 120 crore) and Department of Space (Rs. 8,229 crore against Rs. 4,545 crore).

Almost the entire increase of Rs. 1.15 lakh crore in the capex of BE21-22 over RE20-21, is accounted for by four large provisions. Rs. 20,000 crore have been provided for investing as equity in the proposed new Development Finance Institution in the budget of the Department of Financial Services. A lump sum provision of Rs. 44,715 crore has been made under the Department of Economic Affairs in the name of Support for Infrastructure Pipeline. Provision of Rs. 20,490 crore has been made under Department of Telecommunications in the name of Support to Public Sector Undertakings. A provision of Rs. 18,998 crore for metro projects (against Rs. 6484 crore in RE20-21) has been made in the budget of Ministry of Housing and Urban Affairs. There is also an increase of Rs. 16,173 crore for NHAI and other Road works in the BE20-21 of the Ministry of Road Transport and Highways. Together, these four heads account for increase of Rs. 101,378 crore out of total increase of Rs. 115,073 crore in capex budget of BE20-21 over RE20-21, a share of over 88%.

Are these four capex provisions likely to convert into actual expenditure in 2021-22?

The additional provision for capex in the budget of Ministry of Road Transport and Highways is the most likely to materialise for two reasons. One, the road and infrastructure cess, collected on diesel and petrol, fund these expenditures. As there is good growth in the amount collected as cess on account of substantial transfer of basic excise and customs duty revenues to the non-sharable cess revenue, availability of funds for this expenditure is quite assured. Second, the requirement of funds for road works of both the Ministry and NHAI and servicing of large liabilities of NHAI is growing manifold on account of rising cost of road construction and burgeoning repayment liabilities.

The three remaining capital expenditure are, however, on quite a shaky ground. A closer look at the capital expenditure provisions for Infrastructure Pipeline, equity infusion in DFI and funding commitments for metros, make it quite doubtful that these expenditures would get incurred to any meaningfully significant extent. The lumpsum provision of Rs. 44,715 crore in the name of Support to Infrastructure Pipeline in the Department of Economic Affairs which is an increase of about Rs. 37,000, is totally unspecific. Spending this actually require making budget provision for specific projects in the budget of the Ministry/ Department concerned. Most likely, bulk of this provision would be surrendered unspent during the RE stage next year.

Provision of Rs. 20,000 crore for the DFI capital infusion is also completely unrealistic. There is no clarity about the design and financing model of DFI at this stage. Most likely, the Government owned DFI would be an infrastructure refinance institution with a small direct lending portfolio. The country lacks infrastructure financing institutions except in the housing space. Who would this DFI refinance? In any case, ramping up release of Rs. 20,000 crore equity in one year, is too much to ask for. NIIF was promised Rs. 20000 crore of equity infusion by the Government every year in 2016. After passage of five years, total equity infusion in NIIF does not exceed Rs. 5000 crore.

Track record of infusing funding- equity and loan- depends upon progress of metro projects in the country. Every year, large provisions are made, but every time the actual utilisation turns out to be much smaller.

The railways budget does not have provision for any special loan for Covid related liabilities in BE21-22. Neither did the BE20-21 have it. The two factors which impacted railways’ capex in the current year and also railways operations are still not fully addressed- almost skeleton operation of passenger trains and inability of undertake real expenditure. It seems fairly certain that the Government would have to bail out Railways again in FY 2021-22.

Increase in the capex provisions for FY20-21 is optical illusion and for FY21-22 excessively optimistic and proforma.

 

SUBHASH CHANDRA GARG

04/02/2021, NEW DELHI