The Indian government is considering relaxing quarterly spending limits in an effort to meet its record capital expenditure (capex) target for the fiscal year 2024-2025, amounting to 11.11 trillion rupees.
Amid slow economic growth indicators and reduced spending in the first half of the fiscal year, this strategic move aims to stimulate infrastructure growth, boost economic momentum, and bridge shortfalls in capex achievement.
However, it also brings potential challenges in terms of budgetary constraints and borrowing sustainability.
Slow Start to Spending Amid Economic Pressures
Government spending slowed from April to June due to national elections, and overall expenditure by September was approximately 44% of the annual target—a reduction compared to the same period last year.
Specifically, capital expenditure reached 4.15 trillion rupees in the first half, making up only 37% of the targeted spending.
The delay and shortfall in government spending, particularly in capex, has coincided with slower growth in high-frequency economic indicators, signaling a need for stimulus to spur economic activity.
- Current Capex Levels: ₹4.15 trillion in April-September, only 37% of the target, compared to ₹4.9 trillion during the same period last year.
- FY 2024-2025 Capex Target: Record ₹11.11 trillion.
- Q4 Spending Caps: Current guidelines cap public expenditure for ministries at 33% of the budget in Q4, with a 15% cap for March. However, these caps may be adjusted.
Key Factors Affecting Government Spending
- National Election Cycle: With the national elections in April-June, spending was restrained, impacting the overall capex in the first half.
- Slower Economic Indicators: Lower capital spending correlates with slower growth in industrial output, which saw a decline for the first time in two years in August, though a slight uptick of 2.5% is projected for September.
- State-Level Variations: State governments’ fiscal conservatism has shown mixed signals—lower borrowings point to good fiscal management but may also suggest reduced public spending.
Strategic Relaxation of Spending Limits
The government is now reviewing its expenditure requirements and may decide to relax its usual fourth-quarter spending caps.
The intent is to enable ministries, especially those focused on roads, railways, and infrastructure, to accelerate their spending.
This move aims to not only meet capex targets but also to stimulate sectors that drive economic growth.
Potential Adjustments
- Cash Management Guidelines: Traditional spending caps may be adjusted for the January-March quarter, particularly the March cap of 15%.
- Key Ministries Leading the Charge: Infrastructure-heavy ministries, especially those involved in road and rail development, are on track to accelerate their capex, though challenges remain at the state level.
Market Borrowing Strategy and Implications
The government does not anticipate altering its current market borrowing target, which stands at 14.01 trillion rupees for this fiscal year.
This borrowing plan, set during the COVID-19 pandemic to cover higher redemption of maturing loans, is crucial in maintaining liquidity for sustained economic recovery.
Looking forward, analysts expect that the need for loan repayments in FY 2025-26 may increase gross borrowing, but net borrowing could remain relatively stable.
- Current Fiscal Year Borrowing: ₹14.01 trillion through bonds.
- Potential Increase in FY 2025-26 Borrowing: Due to upcoming loan redemptions.
Key Takeaways: Opportunities and Risks
Opportunities
- Economic Stimulus: By lifting spending limits, the government can direct funds into vital infrastructure projects, stimulating job creation and economic growth in key sectors.
- Improved Economic Indicators: Increased spending may uplift high-frequency indicators, reversing the downward trend observed in industrial output and other growth metrics.
- Support for State Economies: With increased tax devolutions to states, additional spending may bolster state-level economic growth, compensating for reduced state borrowing.
Risks
- Potential Fiscal Strain: Relaxing spending caps without adjusting borrowing could stretch fiscal resources, especially given the upcoming loan redemptions.
- Inflationary Pressures: Higher public expenditure could potentially lead to inflation, particularly if not balanced with production growth.
- Dependence on Q4 Spending Surge: Over-reliance on the last quarter to meet capex goals could lead to inefficient allocation or underutilization of resources.
Outlook: Will the Strategy Meet Long-Term Goals?
India’s proactive approach to boosting capex spending demonstrates its commitment to economic recovery, job creation, and infrastructure development.
By focusing on increased Q4 spending and state-level fiscal support, India may overcome current growth challenges, though the success of these initiatives will depend on a careful balance between immediate expenditure needs and longer-term fiscal sustainability.
In summary, India’s move to ease quarterly spending restrictions aligns with its ambition to achieve a record capex and drive economic growth.
This strategy, while filled with potential, will require prudent management to ensure fiscal discipline and the effective use of resources to meet the nation’s developmental and economic targets for FY 2025.