Budget 2024: Capex Thrust To Continue With Likely Rise In Revenue Expenditure

The government is likely to continue its thrust on capital expenditure, even as revenue expenditure may see higher allocation in this year's budget.

Finance Minister Nirmala Sitharaman will present the budget on July 23. The newly-elected government is expected to continue its thrust on capex in the upcoming budget, after having allocated Rs 11.11 lakh crore for capex in the interim budget presented in February this year. Despite the rise in allocation, the pace of growth of capex eased to 16.9% in the interim budget, compared to 28.4% in the financial year-ended March 2024.

For the full budget, the government is expected to use the RBI surplus transfer to continue to focus on fiscal consolidation, along with a possible hike in welfare spending.

"We expect the general government to stick to the announced fiscal deficit target of 5.1% of GDP for the fiscal 2025 (or even slightly lower) and announce further consolidation to a deficit of below 4.5% of GDP by FY26," Goldman Sachs said in a note. "Even if we see some expenditure allocation towards welfare spending, it may not require a reduction in capex, given the higher than expected dividend transfer from the RBI."

The central government’s fiscal impulse breakdown suggests that the very robust capex CAGR of about 31% over four fiscal ending March 2024 resulted in a growth boost, while welfare spending has been a net drag since fiscal 2022, according to Santanu Sengupta, chief India economist at Goldman Sachs. "In 2024-25, we expect capex to provide a positive impulse, while welfare spending will likely remain a drag."

The capex outlay in the fiscal 2024-25 is likely to be in the range of Rs 11.4-11.5 lakh crore, according to Garima Kapoor, economist at Elara Securities India Pvt. With RBI’s surplus dividend creating a buffer of about 0.4% of GDP, a part of the surplus revenue of Rs 20,000-30,000 crore is expected to be transferred for capital expenditure, she said.

In the current fiscal year so far, on the expenditure front, the thrust on capex continues with roads, railways and defence ministries spending 19.8% of the capex target of the ongoing fiscal interim budget estimate. Capex as a percentage of budget estimate was 12.9% during April-May at Rs 1.4 lakh crore, compared to about 16.8% of the budget outlay for the corresponding period a year ago.

Revenue expenditure, on the other hand, picked up pace during the first two months by 4.2%, against flattish growth during the first two months for the past four years. Revenue expenditure rose to approximately Rs 4.8 lakh crore,13.1% of Budget Estimates for the current fiscal, from Rs 4.58 lakh crore (13.1% FY24BE) in the same period in the previous fiscal.

"We expect the government to enhance revenue spending through a hike in transfer to farmers, under the PM Kisan and other revenue spending in the form of higher MGNREGA allocation," said Kapoor. The shortfall in disinvestment receipts, if any, would be offset by healthy traction of dividends from PSUs, according to her. While the fiscal deficit is likely to be retained at 5.1% of the GDP in the current fiscal, the possibility of a downward revision of 10 basis points or so, can't be ruled out, she said.

Increasing biases towards non-interest revenue expenditure post the general elections would be the guiding factor for the budget—away from the usual capex-led growth, according to Dhananjay Sinha, co-head of equities and head of research at Systematix Institutional Equities.

Budgeted capex is only one part of the planned capex by the central government, with Central Public Sector Enterprises also accounting for a significant portion of total capex by the central government. A huge change has happened in this area, with CPSEs’ capex (excluding Food Corporation of India) having declined for the fourth consecutive year in FY24 revenue estimates, due to which it shrank by an average 7.1% during the government's last term, stated a note by Motilal Oswal Financial Services Ltd.