Steep capex targets being set for 3 dozen public sector companies

Fiscally strained, the central government is going all out to leverage the public sector companies owned by it.

While pressures has been mounted on them to play a larger role in boosting the exchequer via higher-than-usual dividend payouts and share buybacks, they are likely to be asked to increase their capital expenditure to vertiginous heights.

The idea is to cushion an imminent overall decline in overall public investments caused by reduced capex by states and the Centre’s inability, if not hesitation, to scale up its own budgetary spending beyond a limit.

Government sources told FE that about three dozen CPSEs (excluding large unincorporated public sector entities like the NHAI and the Railways) with annual capex budget of Rs 500 crore and above would be directed to raise their capex target for the current fiscal to Rs 3.2 lakh crore, up 50% from the level envisaged at the start of the year. Further, these companies will require to raise their capex to Rs 4.3 lakh crore in FY22, a year which will likely see the economy’s continued over-reliance on public expenditure to negate the possibility of a second year of negative growth. That means the FY22 target will be more than double the original target for the current year.

The targets are being revised upwards despite the fact that CPSEs achieved barely a third of the original capex target of Rs 2.14 lakh crore for FY21 during the year’s first half. Including the likes of the NHAI and Railways, the capex achievement in H1 was Rs 1.5 lakh crore, again a third of the combined annual target for all these entities.

Making a case for a more aggressive government expenditure at this juncture, former chief statistician Pronab Sen recently said the chances of a strong economic rebound in FY22 hinged on how the government firmed up its Budget for FY22. If public expenditure (by Centre/states/PSUs) is not scaled up, GDP might shrink not just in this fiscal but even in the second and third quarters of FY22 once the favourable base effect wanes, he warned.

If in the last financial year, the states had to cut capital expenditure by a quarter from original budget estimate (BE), the reduction in such spending appears to have been even sharper in the first half of the current fiscal year. According to an FE review of budgetary spending by 14 states, in April-September this year, their capex was down 22% on year; considering that the combined capex by all states was budgeted to increase by 31% on year in FY21, the slippage in state capex from the budget target is sure to have been unprecedentedly steep in the Covid-ravaged first half.

At 30% of their annual target, the capex achievement of CPSEs and departmental undertakings in the first half of the financial year showed these companies managed to hold on to the capex pace shown in recent years in the first half, despite the Covid-19 shock. In the last few years, CPSE capex has remained robust; the ratio of capex deployment between the first and second halves of a financial year has been 3:7.

The Prime Minister’s Office (PMO) had recently directed 13 petroleum-sector CPSEs alone to double their capex to Rs 2 lakh crore in FY21 from the initial target of Rs 1 lakh crore and scale it up further to `3 lakh crore in FY22. This is despite the fact that H1 capex performance of these companies were less than a third of yearly target. The move was aimed to putting pressure on these CPSEs to undertake maximum capex in these two years.

The nudge by the government to augment capex may necessitate a significant increase in market borrowings by these firms, considering that in the last 3-4 years, many of them have used up their cash reserves to support the economy hit by a prolonged sluggishness in private investments. Given that the Centre and state governments themselves have stepped up their borrowings in the year to unprecedentedly high levels owing to revenue constraints, the crowding of the market could impact private-sector borrowers.

In a video conference meeting held with CMDs of 13 petroleum-sector CPSEs and Coal India on October 19, finance minister Nirmala Sitharaman expressed dismay over the ‘underperformance’ of CPSEs belonging to the petroleum sector in H1FY21. FM had asked the CMDs to visit project sites in the field in order to find out and resolve issues at ground level.

Coal India has been asked by PMO to increase capex target by 30% to Rs 13,000 crore in FY21 and further to Rs 20,000 crore in FY22. Four capex performance review meetings have been held so far this fiscal at the level of finance minister.

The finance minister is holding review meetings on the performance of capex of CPSEs every month, underscoring the urgency to revive the economy, which is projected by many agencies to contract by around 9-10%, if not more, in FY21. The idea is to soften the blow to the economy from the sharp drop in private investments and slashing of capital expenditures by revenue-starved states.

As per Icra estimate, major states together had a budgeted capital outlay of over Rs 5.7 lakh core for FY21 against RE of Rs 5.1 lakh crore in FY20. However, with Covid-19 severely impacting revenues of state governments, and additional expenditure towards healthcare and public welfare, the capital outlay on infrastructure by the states could decline by 10-40% in FY21, though some states could witness a steeper decline depending on the extent of additional borrowings.

Of course, even though the Centre’s budget capex declined 12% on year in H1FY21 and its overall spending was flat, the government has scaled up the estimated capex for FY21 to Rs 4.4 lakh crore, from a little over Rs 4 lakh crore budgeted.

While revenue constraints led to a slowing of capital expenditure by state governments in FY20, the CPSEs owned by it largely held the fort. With private investments in the doldrums, gross fixed capital formation (GFCF), which was 31.1% of the gross domestic product (GDP) in FY15, declined to 29.8% in FY20. The fall would have been sharper had the CPSEs not acquitted themselves well. In recent years, public capex has been roughly in the 5:5.5:3.5 ratio among the CPSEs, states (budget) and the Centre (budget).