Only capex numbers matter in Budget 2021

A massive burst of investment is needed to repair the economy; the government will have to find a way to do it well

There is only one number which matters in the Budget for 2021-22 that Finance Minister Nirmala Sitharaman is slated to present on February 1. That is the spending on capital, or what is known as capital expenditure. In the first post-Covid budget of the Indian government, this number will loom over every other metric. Others, like deficit, tax revenues and subsidies, are not comparable to the importance of this number this year.

That is because this is the number that will measure how much the government is able to put on the table to repair the economy. And in 2021, this matters like nothing else. Even when we factor in the puny nature of the government capital expenditure historically, it will still remain the most important metric to judge how the repair of the economy will proceed.

This might seem like a pretty obvious course for the government to follow. But the challenge lies in the not-so-obvious way that most governments, and certainly the Indian government, goes about its work.

Any budget, beyond the attractive speech that finance ministers deliver on the floor of the House, is an exercise in accounts. Like any organisation, most of the exercise, therefore, goes to meet committed expenditure. While a smart commercial organisation ensures that the money it generates is used to plough back into investments and so keeps a hawk-eye on expenditure, a government is under no obligation to do so.

So, each year, its expenditure balloons. Despite the protests of fiscal pundits it balloons in both good and bad years. For the Indian government, these heads of expenditure are broadly those on subsidies, on wages and pensions, on defence and on the interest it pays on the borrowings it makes to finance these bills. For the past few years another expenditure has been added to this list – the bill to recapitalise the state-owned banks and insurance companies. Notice this list does not include capital expenditure.

Once the bill is added up, the managers then look at the revenue – both tax and non-tax revenue – to figure out the balance. As I wrote above, since the government ends up borrowing just to meet these committed costs, it is most reluctant to borrow more to finance any additional non-committed cost, like capital expenditure, which, no surprise, gets the boot. It is the remainder after every other committed spending has been taken care of. Therefore, year after year, the needle on capital expenditure hardly moves.

Yet it is not that finance ministers are not aware of the role that spending on investment to build roads, ports, schools and hospitals has for the economy. To make life easier, ministers, within their constraints, take an easy way out to reclassify expenditure in their press releases to show a higher spend on capital.

Still, as the data shows, the exercise does not make the numbers swell up. For instance, what shall be the classification of the expenditure made to recapitalise state-owned banks? For sure, the sum will get included among the entries on capital investment, but as we have seen, without reforms this is just an annual flow to pay for the incapacity of banks. As the aggregate market cap of these banks (excluding SBI) shows, the investors are not impressed. They have good reason not to be.

Post-Covid, there is no doubt that only a massive burst of investment can bring major economies out of a slump on a sustained basis. The private sector has to invest no doubt. But to expect the companies to do so without an indication from the government about how keenly it wants them to respond, will not happen.

When the government does it well, the response is striking. An example of this is the plan for a pan-India roll out of city gas distribution networks. As the government agencies have begun to expand their transnational gas pipelines, companies have bid aggressively to offer piped gas to homes in cities with a network of compressed natural gas stations for automobiles.

A not so good example is the offer of tax sops. It is a risky enterprise. If a tax benefit is across the board, companies do not get a differential advantage that they can exploit, for instance, the cut in the corporate tax rates announced in 2019. Whereas if the benefits are aimed at particular patterns of investment, say for production in a certain variety of textiles, the company which produces those is most happy. The unlucky ones run to the government to also get similar benefits. The high import duties on a range of items is an example of the latter.

There is also another problem with the capex budget. Ministries are often unable to use these funds properly. Departments are good at paying salaries, making policies and so on. They are at their wits’ end when working as project implementation authorities. The only exception is the Ministry of Road Transport and Highways but that has got more to do with the personality of its minister, Nitin Gadkari. So even if FM Nirmala Sitharaman were to hand a large sum to the mega ministries, like power, railways, education or health, they will not be able to invest quickly. And even if they do so, they are likely to earn the censure of auditors for not having considered all the alternatives or having moved too fast.

It would be far better for the finance minister to go the way of the gas projects. Allow the investments to be handled by PSUs like National Highway Authority of India, Solar Energy Corporation of India and NTPC and give them ample freedom to carry those out. What is not necessary is a general offer that they will build more and leave it at that. The government has to build fast and through managers who can do that job well.

(The writer is a business journalist and can be reached at [e-mail])

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.