India’s government seems to favour yet another sharp ramp-up of capital expenditure in its next budget. According to a Mint report, the Centre may raise its outlay for the creation of public assets like highways, ports and airports to ₹10 trillion in fiscal 2023-24, up by third from the current year’s estimate of ₹7.5 trillion, which itself was a 35% hike over the previous year’s figure. For a sense of the incline in this spending path, consider our pre-pandemic level. Central capex was under ₹3.4 trillion in 2019-20. This has been the signature gear-shift of Nirmala Sitharaman as Union finance minister. It has acted as an appropriate response to covid dislocations, given its income multiplier effect, as well as economic compensation for ‘animal spirits’ gone missing in the private sector. When no one else spends, the state must. By some assessments, this logic would still be valid next year. Back in February, the ministry had hoped an infra splurge would support demand and obtain a hearty second-half revival in private investment. This is proving elusive, with war-induced uncertainty, inflation and tighter money acting as dampeners. While 2022 has only been moderately unkind to us, New Delhi is being looked upon to step up its heavy lifting.
Despite the added subsidy burden of this year’s commodity upshoot and our need to sustain welfare provisions for the vulnerable, revenue collections have been buoyant enough to tempt yet another capex boost. October’s GST mop-up of ₹1.52 trillion, the second largest in any month since this tax regime kicked in, included a festive bump-up. Even so, our monthly GST intake has stayed above ₹1.4 trillion for a fairly long stretch. Some of it can be attributed to rising prices, but a commercial uptick is evident. Although the recovery in demand over the past two years has been quite uneven, robust signs of it are visible in sufficient parts of the economy for optimism. A top-heavy spring-back should strengthen our direct tax intake. And so it has: the gross rake-in of corporate and income taxes jumped 24% from a year earlier in the first half of 2022-23. This momentum is unlikely to be lost, which means we may end 2022-23 with a larger revenue kitty than we’d budgeted. This is also what the current trend in the Centre’s fiscal gap—between inflows and outgoes—points to. Since capex tends to enhance an economy’s overall capacity for expansion, it’s also tempting to marvel at the irony of a health crisis having spurred a public-spending rejig for the better.
Of course, it’s not that easy. A revival of demand has also brought excessive inflation along, a problem that could persist in spite of interest rate hikes and defeat our post-2016 policy pursuit of price moderation. After huge doses of fiscal and monetary stimulus, much of the world faces cost-of-living flare-ups. Indian price instability isn’t as bad as past episodes, sure, but unless the Centre tightens its fiscal deficit significantly, our central bank will find it very hard to fulfil its legal mandate to keep the rupee’s internal and external value stable. That crucial gap, budgeted at 6.4% of GDP this year, though smaller than its pandemic peak of 9.2% in 2020-21, would need to shrink much faster than laid out by the finance ministry’s glide path if its impact on general price levels must be softened. Yes, this spells tough trade-offs. For capex to reach ₹10 trillion, other central expenses will need drastic cuts, even as a far larger sum than ever is raised via asset sell-offs. It’s not impossible, but a challenge all the same.
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