Why The Government Meeting Its FY25 Capex Target Could Be A Tall Order

Amid a slow start to spending because of the general elections, the central government could see some slippage on the full year capex target despite a pick up in spending in the second half of the fiscal, say economists.

The government's capital expenditure was retained at Rs 11.11 lakh crore for the ongoing fiscal. Of this, it has spent Rs 3 lakh crore, or about a fourth of its target so far. The centre spent slightly over 16% of its capex target by the April-June quarter, spending about a quarter of its target by August, according to last available data by the Controller General of Accounts.

While the general elections slowed capex in the first quarter of the fiscal, the south-west monsoons, too, likely hampered the pick-up in capex post elections. Given the pace of spending so far, concerns remain on whether it will be able to meet its full year target, even as the second half of the year is expected to see a pick up.

"Our analysis of the past three periods of General Elections years in FY09, FY14 and FY19 shows that annual capex spending tends to fall below the Budget target by an average of about 7.7%," said Garima Kapoor, economist at Elara capital. "While we expect a similar trend to play out this year, what is intriguing is Q1 spend was significantly lower than the Q1 spending run rate in previous two Lok Sabha election years," she added. 

A meaningful pickup in the union government’s capex spending post-elections remains absent as capital spending in August 2024 fell by 30% year-on-year, following a post-elections surge of 108% in July 2024, she said. "Going by the trend, we expect the central government to undershoot Budget estimates by Rs 70,000-75,000 crore in FY25E, given any uptick hereafter would be inadequate to offset the slow start," she said.

Of the Rs 11.1 lakh-crore capex target for the fiscal, Rs 1.5 lakh crore was target for capital loans to state governments, said Gaura Sengupta, economist at IDFC First bank. There is a chance that full-year target for capex loans to state government may not be met, as this is a truncated year due to the general election. As per press reports till date, a small proportion of the Rs 1.5 lakh-crore has been approved.

Separately, state capex, too, is likely to come in lower than target on an aggregate. Combined capex by major states is projected to rise by 13% to Rs 6.5 lakh crore in fiscal 2025, as per ICRA's estimates, lower than the budget estimate of Rs 7.2 lakh crore.

Interbank liquidity conditions also indicate pick-up in government expenditure once the final budget was presented, said Gaura Sengupta, economist at IDFC First bank. Overall government cash surplus for the centre and states, which had peaked at Rs 5.1 lakh crore as of May this year—post the RBI dividend—has reduced to Rs 2.3 lakh crore in October, indicating rise in overall government expenditure.

The government is taking steps to meet the targets by pushing ministries towards execution. Hence, there is likely to be pick up in the second half of fiscal 2025, said Teresa John, economist at Nirmal Bang Institutional Equities. Still, some slippage on targets may be inevitable as capex has marginally fallen short, even in years where it has been front loaded, she added.

It may be somewhat of a tall order, but possibility of capex spends getting bunched up in H2FY25 remains, said Yuvika Singhal, economist at QuantEco. The government is commitment to pushing infrastructure, and it will serve well to cushion the slowdown in growth momentum, she added.