Analysis of Budget 2024, Part 2:

The Real Reason Behind Increase in Capital Expenditure

Hike in Capital Expenditure for the Fourth Year

Union Budget documents show that the budget outlay this year is just 6.1% above last year — which means it is stagnant in real terms. And the budgetary outlay as a percentage of GDP is actually lower as compared to last year. In fact it has consistently fallen for the last 4 years (since 2020–21), and is lower than that for 2020–21 by more than 3 percentage points — that is a huge reduction (Table 1)![1]

Table 1: Budget Outlays, 2020–21 to 2024–25 (Rs cr)

	2020–21 A	2021–22 A	2022–23 A	2023–24 RE	2024–25 BE
Budget Expenditure	35,09,836	37,93,801	41,93,157	44,90,486	47,65,768
Budget Exp. as % of GDP	17.7	16.1	15.6	15.3	14.5

Within the limited budget outlay, Finance Minister Nirmala Sitharaman has announced a hike in capital expenditure (or capex) — of 16.9%. This is the fourth year in succession that she has announced a hike in capital expenditure. But the increase in budget outlay during these past four years has been significantly less than the increase in capital expenditure. With the result that the capital expenditure as a percentage of budget outlay has gone up steadily from 12.1% in 2020–21 (Actuals) and 15.6% in 2021–22 (Actuals), to 23.3% in this year’s budget estimate (see Table 2).[2]

Table 2: Budget Outlay and Capital Expenditure, 2020–21 to 2024–25 (Rs cr)

	2020–21 A	2021–22 A	2022–23 A	2023–24 RE	2024–25BE
Capital Expenditure (Capex)	4,26,317	5,92,874	7,40,025	9,50,246	11,11,111
Increase in Capex over previous year		39.1%	24.8%	28.4%	16.9%
Budget Outlay	35,09,836	37,93,801	41,93,157	44,90,486	47,65,768
Increase in Budget Outlay over previous year		8.1%	10.5%	7.1%	6.1%
Capex as % of Budget Outlay	12.1%	15.6%	17.6%	21.2%	23.3%
Capex as % of GDP	2.1%	2.5%	2.7%	3.2%	3.4%

Justifying this huge increase in capex over the past four years, the FM in her 2024 budget speech stated: “Building on the massive tripling of the capital expenditure outlay in the past 4 years resulting in huge multiplier impact on economic growth and employment creation, the outlay for the next year is being increased by 11.1 per cent (as compared to last year’s BE) …”

Both these claims are a part of the tapestry of lies the Modi Government has been weaving to hide the reality of the economic crisis gripping the country. Contrary to the claims of the Finance Minister, the huge increase in capital expenditure over the past 4 years has not had any “huge multiplier impact on economic growth and employment creation”. In a detailed article published recently in Janata Weekly, we have shown that the Modi Government’s GDP growth rate figures are dubious; and that actual GDP figures are probably 30–45% below the official figures. In another article in Janata Weekly on the economic situation in the country in early 2024, we have given extensive data to show that the country is facing an unprecedented unemployment crisis, the worst in the past several decades — which means that the increase in capex has not led to any employment generation too.[3]

That an increase in capex, without increasing budget outlay, is not going to lead to economic growth and employment generation — is actually simple economics common sense. Let us explain.

Will Capex Lead to Economic Growth

We have given considerable data in previous articles published in Janata Weekly showing that:

• large masses of the people are suffering from poverty and unemployment, and only a tiny section of the population has significant purchasing power;[4]
• growth rate of private consumption (PFCE) has consistently fallen during the post-pandemic period, and unless demand picks up, the growth rate in private investment is not sustainable;
• the increasing economic distress being faced by the majority of the people during the past decade can also be observed from data put out by the RBI which shows that net financial savings of households have fallen to a record low, which means that people are drawing down on savings to fund consumption.[5]

And so we concluded that there is not much scope in the economy for an increase in demand; demand will only increase if the government increases its budgetary expenditure and implements measures to put purchasing power in the hands of the common people. That would require the government to increase its social sector expenditure, take concrete measures to create jobs, increase subsidies for agriculture and MSMEs, etc. — all of which require the government to increase its budgetary outlay. If the government does not take steps to increase demand, that is, if the government does not significantly increase its budget expenditure, and only increases its capital expenditure, and hopes that this is enough to incentivise private corporations to increase their investment, that is not going to happen. Why will private capitalists increase investment and hence production, if there is no increase in demand? And if there is no increase in investment, obviously there is going to be no job generation.

This can also be understood by looking at the state of the economy from another angle. Industry has been suffering from excess investment for the past more than a decade; this is reflected in the fact that capacity utilisation in industry been hovering at around 75%. New investments take place only when capacity utilisation reaches close to 90%.[6] In such a situation, when private industry is already suffering from over-capacity, even if the government gives incentives to the capitalists in the form of increasing capex in the hope that they would increase their investment, that is not going to fructify; the capitalists are going to simply pocket the subsidy and increase their profits.

This is precisely what is happening.

Industrial Production Stagnant

According to the latest figures released by the Ministry of Statistics and Programme Implementation, the increase in capex has not led to any significant pickup in industrial production. Index of Industrial Production (IIP) data, which tracks growth in multiple industry groups within the Indian economy, shows that industrial growth in 2023–24 (over the previous year) was only 5.8%, marginally higher than the 5.2% growth clocked in 2022–23. The latest ‘Quick Estimates of Index of Industrial Production’ data released by the MoSPI show that industrial growth rate has begun slowing down again — it was 5.6%, 5.4% and 5.0% for the months of February, March and April 2024 respectively (over the corresponding period of previous year). Overall, the average annual industrial growth during the Modi years (2014–15 to 2023–24) has been just 3.6%. This is less than half the industrial growth rate clocked during the UPA years — IIP data show the average annual industrial growth rate to be 7.3% over the period 2005–06 to 2013–14.[7]

Industry comprises of three sectors — mining, manufacturing, and electricity. Of these, the IIP data show that the manufacturing sector has grown at only 5.5% in 2023–24 over 2022–23. The data also shows a modest average annual growth of 3.1% in the manufacturing sector over the Modi years 2014–15 to 2023–24.[8] This is way below the year-on-year growth target of 12–14% set by Prime Minister Modi in September 2014, at the time of the launch of the ambitious ‘Make in India’ programme whose ostensible aim was to transform India into a global manufacturing hub. The programme had set a target of catapulting the Indian manufacturing sector to 25% of GDP by 2020, from 16.3% in 2014. The target year was later pushed back first to 2022 and now to 2025.[9] But in actuality, the share of manufacturing in GDP has fallen to 14.3% in 2022–23 and 14.1% in 2023–24.[10]

The supply-side economics that the FM and her economic advisors believe in is actually humbug. Without taking concrete measures to boost demand, just giving myriad subsidies to corporate houses — from tax concessions and loan write-offs to government grants under the rubric of capital expenditure — is not going to lead to increased private investment. Probably out of exasperation that all these massive subsidies were not leading to larger industrial investment, FM Nirmala Sitharaman, in a speech in September 2022, asked industry captains what is holding them back from investing in manufacturing? Modi and his Cabinet Ministers probably believe that the solution to every problem can be found by invoking ‘Bajrang Bali’. And so the FM exhorted India Inc., “You don’t believe in your own capacity, in your own strength and there has got to be someone standing next to you and say you are Hanuman, do it? Who is that person who is going to tell Hanuman? It can’t certainly be the government.”[11]

Then Why the Increase in Capex?

All the data given above, to debunk the claims being made by the FM about the benefits of increased capital expenditure to the economy, are official data. It only means that the FM is deliberately lying when she claims that increased capex has had a “huge multiplier impact on economic growth and employment creation”.

Then why is the FM increasing capex so hugely? The real reason is — it is yet one more way of transferring public funds to big corporate houses.[12] Under the rubric of capital expenditure, the Modi Government is actually doling out subsidies to private corporations in the guise of attracting private investment in the infrastructure sector — such projects are eulogised as public–private–partnerships (or PPP). The argument given by the Modi Government for these subsidies is that investments in infrastructure are not very profitable, and so it is necessary for the government to finance a part of the project cost so as to make it attractive for the private investor to invest. This is also called viability-gap funding (or VGF) — which means that the government will fund the difference between the expected rate-of-return on investment by the private player and the actual profit earned by it. The VGF is often as much as 40% of the total project cost, sometimes even more, and is often paid upfront (that is, in advance). While the risks in all these PPP projects are borne by the government, the profits are all pocketed by the private partner. What a partnership!

Table 3: Capital Expenditure in the Union Budget, 2020–21 to 2024–25 (Rs cr)

	2020–21 A	2021–22 A	2022–23 A	2023–24 RE	2024–25 BE
Budget Capital Expenditure (3)	4,26,317	5,92,874	7,40,025	9,50,246	11,11,111
of which:
Ministry of Railways (1)	1,17,271	1,37,100	1,59,256	2,40,000	2,52,000
Ministry of Road Transport and Highways (2)	1,13,312	1,87,744	2,05,986	2,64,526	2,72,241
(1+2) as % of (3)	54.1%	54.8%	49.4%	53.1%	47.2%

The ministries where the maximum capital expenditure is taking place are the Ministry of Railways and the Ministry of Road Transport and Highways. These are precisely the ministries where private corporate houses are investing in a big way. Thus, nearly 25% of the budgetary capex is for Ministry of Road Transport and Highways (Table 3). But the government does not build many roads and highways anymore! Most of the expressways, high speed roads, flyovers, flyovers over flyovers, etc. being built across the country are being built by the private sector, with 40% or even more of the project cost being financed by the Central government in the name of viability-gap funding. This only means that most of the capital expenditure shown in the budget outlay for Ministry of Road Transport and Highways is being transferred to the private sector as grants! [13]

Likewise, another 25% of the budgetary capital expenditure is going to the Ministry of Railways. An article in the Financial Express explains how this money is being spent: “The government is reworking the terms of the public private partnership (PPP) model for assorted railway projects, to make it more attractive to private investors and bridge a viability gap perceived by sections of investors. The new PPP model will also include a hybrid model on the lines of the reasonably successful one in the highway sector, where the government makes upfront payment of 40% of the project cost to the developer under the build operate transfer (BOT) mechanism.”[14] Since the Indian Railways is gigantic, the government is chopping it up into small parts, and initially privatising those parts which would be most profitable for the private investors. One such part being privatised is 16 railway stations, in the name of modernisation. A report in the business newspaper Mint stated: “Indian Railways is exploring a new public–private–partnership (PPP) model to attract private investment to redevelop railway stations, two people aware of the development said. Under this model, investors would receive up to 40% of the total project cost as viability-gap funding (VGF) and be allowed to use the space above platforms and tracks commercially.”[15]

Notes

1. Budget data taken from: Budget at a Glance, Union Budget documents, various years; GDP figures are taken from: Press Note on Second Advance Estimates of National Income 2023–24 …, MoSPI, 29 February 2024, https://mospi.gov.in.

2. Data taken from: Union Budget documents, various years.

3. Neeraj Jain, “The Economic Situation in 2023–24, Part 1: Is India Becoming a $5 Trillion Economy Soon?”, Janata Weekly, 12 May 2024, https://janataweekly.org; Neeraj Jain, “The Economic Situation in 2023–24, Part 2: India’s Appalling Unemployment Crisis”, Janata Weekly, 19 May 2024, https://janataweekly.org.

4. Neeraj Jain, “Analysis of Budget 2024–25, Part 1: Declining Budget Outlay”, Janata Weekly, 9 June 2024, https://janataweekly.org. See also: Neeraj Jain, “The Economic Situation in 2023–24, Part 2: India’s Appalling Unemployment Crisis”, ibid.; and Neeraj Jain, “The Economic Situation in 2023–24, Part 3: India’s Grim Poverty Situation”, Janata Weekly, 19 May 2024, https://janataweekly.org.

5. Neeraj Jain, “Analysis of Budget 2024–25, Part 1: Declining Budget Outlay”, ibid.

6. “Capacity Utilisation Improves to 74% in Sept 2023 Quarter: RBI OBICUS Survey”, CMIE, 8 February 2024, https://www.cmie.com; M.K. Venu, “Is This a Lost Decade for Indian Manufacturing?”, 17 January 2023, https://thewire.in.

7. Our calculation, from figures given in: “Table 28: Index Numbers of Industrial Production”, https://rbidocs.rbi.org.in; and Quick Estimate of Index of Industrial Production and Use-Based Index for the Month of April 2024, Press Release, 12 June 2024, https://www.mospi.gov.in.

8. Ibid.

9. Jayakhosh Chidambaran, “Make in India: An Abysmal Failure”, 22 January 2024, https://madrascourier.com; “India iPhone Breakthrough Masks Struggle to Boost Manufacturing”, Bloomberg, 13 January 2023, https://www.livemint.com.

10. Data on share of manufacturing sector in GDP taken from: Press Note on Second Advance Estimates of National Income 2023–24 …, MoSPI, 29 February 2024, https://mospi.gov.in.

11. “What Is Holding Back Your Investments: FM Asks India Inc”, 13 September 2022, https://www.thehindubusinessline.com.

12. We have given elaborate data on these transfers to private corporations in an earlier article published in Janata Weekly: Neeraj Jain, “Modi’s Only Guarantee Which Is Not a Jumla: Allow Adani–Ambani to Loot the Country”, Janata Weekly, 26 May 2024, https://janataweekly.org.

13. See for instance: “Building Highways: Build-Operate-Transfer (Toll) Model to be Tweaked Further to Regenerate Interest of Investors”, 8 May 2023, https://www.financialexpress.com.

14. “Railway PPP Model Being Reworked to Lure Investors”, 15 December 2022, https://www.financialexpress.com.

15. Railways Eyes Private Funding to Redevelop 15 Stations”, 27 February 2023, https://www.livemint.com.

(Neeraj Jain is a social–political activist with an activist group called Lokayat in Pune, and is also the Associate Editor of ‘Janata Weekly’, a weekly print magazine and blog published from Mumbai. He is the author of several books, including ‘Globalisation or Recolonisation?’ and ‘Education Under Globalisation: Burial of the Constitutional Dream’.)