Union government capex declines, challenging fiscal stability.

Source: The post Union government capex declines, challenging fiscal stability has been created, based on the article “An opportunity in capex decline” published in “Business Standard” on 8th January 2025

UPSC Syllabus Topic: GS Paper3- Economy- Government Budgeting.

Context: The article discusses the decline in the Union government’s capital expenditure, mainly in roads, defence, and telecom. It highlights underutilized funds, delayed equity infusion in BSNL, and unspent allocations for new schemes, suggesting potential fiscal adjustments to manage revenue shortfalls.

For detailed information on Union Budget 2024-25- Analysis read this article here

What is the Current State of the Union Government’s Expenditure?

1. The Union government’s capital expenditure (capex) has decreased by 12% from April to November 2024 compared to the same period in 2023.
2. Despite a target of 17% growth to ₹11.11 trillion for 2024-25, the government might struggle to exceed the previous year’s ₹9.48 trillion.
3. Revenue expenditure is showing a better trend, increasing from 2% growth at the end of June 2024 to 7.8% by November 2024, with a budget projection of a 6% rise for the year.

Why is the Union Government’s Capital Expenditure Declining?

1. While some blame the seven-phase general elections (April-June 2024) for slowing capex, the trend did not reverse in later months.
2. Even after the elections, the April-November period still saw a decline of 12%, reflecting deeper structural issues.

What are the impacts of Union Government’s Capital Expenditure Declining?

1. Over 90% of total capex is concentrated in six sectors: roads, railways, defence, telecom, transfers to states, and new schemes.
2. However, major declines were seen in:

• Roads and highways: A 16% fall in spending,
• Defence: A 15% decline.
• Indian Railways: Capex fell only by 1% to ₹1.68 trillion, showing resilience.
• Transfers to states: Increased by 5%, though much lower than the budgeted 41% rise.
• Telecom (BSNL Equity Infusion): Only 6% of the budgeted ₹0.83 trillion was spent. In contrast, last year’s infusion exceeded the budgeted amount.
• New Schemes: Only 4% of the ₹0.62 trillion allocation was used, leaving ₹0.63 trillion unspent.

3. 25 State capex (accounting for 95 per cent of all the states’ and Union territories’ total capex budget) grew by just 1% in April-November 2024-25. States like Andhra Pradesh, Kerala, and Telangana saw declines, but the overall impact has been limited so far. A continued slowdown in central transfers may affect states’ capex programs later.

What Should the Finance Ministry Do?

1. To manage revenue shortfalls and rising revenue expenditure, the finance ministry could:

• Avoid infusing ₹0.83 trillion equity into BSNL and encourage it to raise market resources.
• Withhold ₹0.6 trillion for new schemes.

2. By saving ₹1.43 trillion (nearly 0.5% of GDP), the ministry could meet the 2024-25 fiscal deficit target of 4.9% of GDP. This slowdown in capex, while concerning, could provide fiscal flexibility.

Question for practice:

Discuss the reasons behind the decline in the Union Government’s capital expenditure and its potential impacts on key sectors and fiscal management.