Cutting back: CPSEs too slow capex, halve such spend in June quarter

The Centre is endeavouring to maintain capex pace despite the Covid-19 crisis and intends to achieve the target of Rs 4.12 lakh crore for FY21 compared with Rs 3.37 lakh crore in FY20.

Capital expenditure by central public sector enterprises and other state-run entities like NHAI and railways (CPSEs) halved from the trend level in the April-June quarter, according to official sources.

Though this may still be better than the performance of private sector entities during the period, the development could have a serious debilitating effect on the economy, as the bureaucracy-ridden state-run firms would take longer than others to re-deploy capex once it is slowed down.

With a nearly 40% share, CPSEs have in recent years been the main pillar of public capex and have largely kept pace, even as the other two segments — central budget (25%) and states (35%) faltered.

According to official sources, some 250 CPSEs among themselves spent just 7% of their annual target in Q1FY21, compared with the trend of spending 15% of annual target or thereabouts in the first quarter.

Over 70% of the capex materialises in the second half of the financial year.

The CPSEs, under government prodding, have set a target to invest about Rs 4.5 lakh crore from their internal accruals and borrowings in FY21; the target itself was lower than the estimated Rs 5 lakh crore (revised estimate) for FY20RE. In fact, the actual capex achievement by CPSEs in FY20 is believed to be a little lower than the RE, as the economic slowdown accentuated in the second half of last fiscal.

As reported by FE earlier, while revenue constraints led to a slowing of capital expenditure by state governments in FY20, the CPSEs owned by it largely held the fort, preventing public expenditure from losing its share in the gross domestic product (GDP). The combined capital expenditure by the CPSEs with annual capex budgets above Rs 500 crore turned out to be Rs 4.41 lakh crore in FY20. This was 90% of the Rs 4.9-lakh-crore target for the year and 1.1% higher than the capital spending by these entities in the previous year.

Of course, the CPSE capex growth too slowed considerably since FY18, but the rate of decline in the growth has been lower than that in other segments of the economy like private investments and private consumption. The CPSEs acquitted themselves even as the state governments, hit by revenue constraints, slowed their budgetary capex.

The Centre is endeavouring to maintain capex pace despite the Covid-19 crisis and intends to achieve the target of Rs 4.12 lakh crore for FY21 compared with Rs 3.37 lakh crore in FY20. “After expanding by a sharp 24% in April, partly reflecting up-fronting of some spending, (the Centre’s) revenue expenditure contracted by 26% in May. In contrast, capital outlay, which had shrunk by 8% in the first month of the lockdown, rose by a substantial 57% as the lockdown restrictions were partly eased,” Aditi Nayar, principal economist at Icra, wrote in The Indian Express recently.

States, which together invested Rs 4.5 lakh crore in FY19 and were estimated to spend Rs 5.8 lakh crore in FY20 (actual to be lower), virtually halted capex in April-May due to cash crunch as tax revenues have slowed down significantly after outbreak of Covid-19.

Many, including IMF and rating agencies, project India’s GDP to shrink by 4-5% or more in FY21. The country’s GDP growth slowed to an 11-year low of 4.2% in FY20 and the Centre’s fiscal deficit in FY20 was revealed to be 4.6% of GDP, the highest level since FY13. The FY21 fiscal deficit could be even double the budgeted level of about Rs 8 lakh crore, according to analysts.