Capex in the Indian Economy

Source: The post capex in the Indian Economy has been created, based on the article “A case of capex under the ‘macroscope’” published in “The Hindu” on 2nd February 2024.

UPSC Syllabus Topic: GS Paper3-Indian economy- growth and development; infrastructure

News: The article discusses India’s economic recovery after COVID-19, focusing on increased government spending on infrastructure (capex) and investments. It mentions a rise in exports, improvements in domestic investments, and specific budget allocations for infrastructure, defense, and green energy projects.

What is the current status of capex in the Indian Economy?

Investment Ratio Improvement: India ranks fourth in the G-20 for investment ratio improvement post-COVID-19, following Mexico, Italy, and South Africa.

Investment Ratio Increase: India’s investment ratio improved to 29.8% of GDP in 2023-24 from 27.3% in 2020-21.

Public Sector Enterprises (PSEs): PSEs are spending less, with a 10% contraction in capex in 2024.

Reduced Gross G-Sec Borrowing: With a decrease to ₹14.13 trillion, the lowest in three years, it’s expected to improve the private sector’s access to funds at potentially lower interest rates.

What are the special provisions for capex in the Budget for 2025?

Record Capex Allocation: The 2025 budget sets a high capex of ₹11.11 trillion, the highest in two decades, focusing on infrastructure and economic development.

Railway Projects: A significant portion of the budget is dedicated to railway infrastructure, including the development of three major rail corridors for better logistics and connectivity. Additionally, 40,000 rail bogies will be upgraded to Vande Bharat standards.

Defense Sector Boost: Defense capex is allocated ₹1.72 trillion, underlining the emphasis on self-reliance (Atmanirbhar Bharat) in defense. This includes new schemes for deep-tech technologies.

Loans and Advances: The budget plans for loans and advances to jump to ₹1.71 trillion in 2025, supporting state-level capex initiatives, especially in infrastructure.

Housing Expansion: The budget expands the PM Awas Yojana (Grameen), aiming to add two crore houses over five years, boosting the affordable housing sector and rural infrastructure.

Green Energy Push: Promoting green energy, the budget includes providing one crore households with 300 units of free electricity per month through rooftop solarisation, fostering solar asset creation in rural areas.

Fiscal Consolidation: The fiscal deficit target is set at 5.1% of GDP in the FY25 Interim Budget, lower than the expected 5.3%-5.4%, balancing the reduced PSE capex and signifying fiscal discipline.

What are the challenges faced by capex in the Indian Economy?

PSE Capex Slowdown: The PSE capex budget for 2024 was slashed from ₹4.88 trillion to ₹3.26 trillion, leading to a contraction of 10% in spending. This decrease marks a challenge for India’s overall capex growth, as the PSE capex to GDP ratio is projected to drop to 1.0% in 2025, the lowest in recent years.

Way forward

the way forward for India involves leveraging its increased capex allocation, particularly in infrastructure and defense, to stimulate economic growth. Continued investment in housing and green energy initiatives is crucial. Addressing the slowdown in Public Sector Enterprises’ spending and maintaining fiscal discipline, as evidenced by the lower-than-expected fiscal deficit target, are key to sustaining long-term economic health and development.

Question for practice:

Discuss the key provisions, challenges, and the way forward for capital expenditure (capex) in the Indian economy.