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The curious case of fiscal investments

Higher central government capex a reflection of lower CPSE capex

* Central government’s capex has surged notably over the past 18 months or so. At the same time, the government has done a laudable job of improving the transparency and coverage of fiscal accounts. Accordingly, it has taken some off-budget capex into its books, which made the comparison tricky over the past 2-3 years. Similarly, government’s capital spending also includes loans & advances (L&A) allocated to states. Therefore, one must consider Central Public Sector Enterprises (CPSEs) and the states’ capex and exclude L&As to conduct an apple-to-apple comparison.

* An analysis of the public sector capex by including Center, CPSEs and states indicates that the conclusion is in stark contrast to the broad narrative of considering the Central Government capex alone.

* Although Center’s capex has spiked, the public sector capex stood at 6.0% of GDP in FY22, lower than 6.1% of GDP in FY18/FY19 but higher than 5.8% of GDP in FY21. More importantly, while the Center’s capex is budgeted to rise in FY23, it is likely to contract for the third consecutive year for CPSEs and remain broadly stable for states. Accordingly, public sector capex is likely to fall to an eight-year low of 5.7% of GDP in FY23.

* This is because the Center is only one branch of the public sector. Higher Central government capex is a reflection of reallocation of CPSE capex. The share of the Center in public sector capex is expected to rise to 39% this year, up from ~25% in FY18/FY19, while the share of CPSEs could decline to 24% from 38% in the pre-COVID period.

* Therefore, instead of focusing on only one section of the public sector (i.e., Union Government), we must look at the comprehensive picture. The sharp surge in Center’s capex over the past 18 months or so does not imply higher public sector capex, which is what matters for the economy.