How Nameplate Changes, Sleight of Hand Helped the FM Assemble Budget 2022’s ‘Big Capex Boost’

What you lose on the wings, you gain on the roundabouts. 

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With no other major growth investments or policy reforms in the budget, finance minister Nirmala Sitharaman made capital investment the lynchpin of the government’s growth strategy in Budget 2022.

Stressing that “the virtuous cycle of investment requires public investment to crowd-in private investment” she took high moral ground to say that the “public investment must continue to take the lead and pump-prime the private investment and demand in 2022-23”.

To walk the talk, the finance minister stepped up the outlay for capital expenditure in the central government budget sharply by 35.4% – from Rs 5.54 lakh crore in 2021-22 to Rs 7.50 lakh crore in 2022-23.

She exuded pride in further declaring that the capex outlay in 2022-23 would be as high as 2.9% of GDP and, if the provision made for the creation of capital assets through central grants-in-aid to states is taken into account, the ‘effective capital expenditure’ of the Union government would rise as high as Rs 10.68 lakh crore in 2022-23, amounting to 4.1% of GDP.

What is the total capital expenditure in Budget 2022-23?

First, it is important to understand that the larger central public sector comprises two big groups – one, the Union government with its ministries and departments and two, central public sector enterprises and entities.

Central government’s capital expenditure (let us call this CGCE) is incurred through a provision in its budget, which includes budgetary support in the form of equity and loans to public sector enterprises (PSEs).

PSEs raise their own capital resources from the market as well. Their own resources are classified as internal and extra-budgetary resources (IEBR).

The CGCE and IEBR together make up the total Union government and public sector capital expenditure (total central capex).

The Union government’s loans to the state governments also count as the CGCE, even though actual capital expenditure is made by the state governments. Such loans are not real central government capex.

The total Central government and public sector capital expenditure is disclosed in Statement 1 of the Expenditure Profile placed in parliament as part of the budget documents.

Central government capital expenditure, which the finance minister spoke about eloquently, was Rs 5.54 lakh crore in Budget 2021-22 and rose to Rs 7.50 lakh crore in Budget 2022-23.

The IEBR of the PSEs, as disclosed in Statement 1, was Rs 5.83 lakh crore in Budget 2021-22 and has decreased to Rs 4.69 lakh crore in budget 2022-23.

The Union government has enormously hiked the loans to state governments from Rs 10,000 crore in Budget 2021-22 to Rs 1,00,000 crore in Budget 2022-23.

The total Central government and public sector capital expenditure – which as per Statement 1 in Expenditure Profile 2022 was Rs 11.37 lakh crore in budget 2021-22 – has been placed at Rs 12.20 lakh crore in budget 2022-23.

It is a net increase of Rs 83,000 crore, not Rs 2 lakh crore.

If you exclude an increase in loans of Rs 90,000 crore to the state governments, the Union government capex in 2022-23 is only Rs 11.30 lakh crore – a net reduction of Rs 7,000 crore.

Who spends central government capital expenditure?

The bulk of the capital expenditure of the Union government is spent on two assets. One of them is transport infrastructure, i.e. building roads and highways and on railway infrastructure, including metros. And the other is in things like defence arms, equipment and other items.

A great deal of the transport infrastructure capex takes place through PSEs and departmental undertakings. The government provides this support in the form of equity and loans to these organisations.

Statement 26 in the Expenditure Profile provides details of Central government capital expenditure through the public enterprises and other autonomous entities.

In Budget 2021-22, the equity and loans budgetary support provided to the public enterprises was Rs 2.46 lakh crore – Rs 2.23 lakh crore of equity and Rs 23 lakh crore in loans. In the 2022-23 budget, this provision has further gone up to Rs 3.61 lakh crore, out of which Rs. 3.34 lakh crore is in equity and Rs 27 lakh crore in loans.

The Central government capex through the public enterprises has gone up by Rs 1.15 lakh crore in 2022-23.

The capital outlay for defence services provision, Rs 1.35 lakh crore in Budget 2021-22, has gone up to Rs 1.52 lakh crore in Budget 2022-23.

Of the capital expenditure provision of Rs 7.50 lakh crore in Budget 2022-23 – excluding the capex through public enterprises, state government loans and Rs 1.52 lakh crore of defence capital expenditure – only Rs 1.39 lakh crore of capex is incurred by all other ministries and departments.

Losing on roundabouts what you gained on wings

Two tweaks cancel out the increased capex of Rs 1.15 lakh crore through public sector enterprises and entities.

The National Highways Authority of India (NHAI) constructs national highways funded partly by the Government of India and the rest of the funding is raised as loans and bonds from the market.

In Budget 2021-22, the NHAI’s national high construction capex programme was of the order of Rs 1,22,350 crore. This was budgeted to be funded by Rs 57,350 crore of equity support from the Government of India and the rest Rs 65,000 crore by borrowings and other resources raised by NHAI on its own account.

For 2022-23, the NHAI’s capex is Rs 1,34,015 crore.

Making a complete departure, the Government of India has decided to turn around and fully fund the NHAI’s capex programme!

The NHAI would not borrow anything for funding its capex programme in 2022-23! The government of India has substituted the NHAI’s borrowings for capital expenditure.

This whole arrangement has meant that, while the government’s capital expenditure has gone up by Rs 76,015 crore, the NHAI’s capital expenditure on its own account has come down by at least Rs 65,000 crore – the equivalent of the previous year.

The net increase in public sector capital expenditure stands cancelled out at least, to the extent of Rs 65,000 crore.

There is one more such scaling up of budgetary support and substitution of public sector outlay in budget 2022-23.

In the case of BSNL, its capex in budget 2021-22 was Rs 19,115 crore, of which the government was to provide Rs 14,115 crore. In the revised estimates of FY 2021-22, BSNL’s capex has been reduced to Rs 5,000 crore only, entirely met from the resources of BSNL.

In Budget 2022-23, the BSNL capex has been hiked up massively to Rs 44,720 crore, but, take notice of the change, entirely funded by the government.

The capex provision from the government budget for NHAI and BSNL, in substitution of their own resources, total up to Rs 109,720 crore. This expenditure only substitutes the IEBR resources of these two entities.

This substitution has enhanced the capex of the government but will not lead to any increase in the overall capex of the government and the public sector.

Representative Image. Photo: Twitter/@CMDBSNL

Nameplate capex increase

Increased transfer of Rs 9 lakh crore to states as loans from the Union government makes another part of the central government’s increased capex. This loan is not central government capital expenditure. This is only nameplate capex.

The states, sovereigns in their sphere of allocated responsibilities, have the constitutional authority to raise loans for their expenditure. States borrow mostly from the market to raise their loan resources. States’ overall permitted borrowing limits include borrowings of 4% of gross state domestic product (GSDP) and loans being provided by the Union government. Together, this overall borrowing is a little less than 4.5% of the states’ GSDP in 2022-23.

States could have very well raised Rs 1 lakh crore from the market for their capital expenditure. By offering loans to states, the Union government, in fact, is distorting the fiscal federal reform process initiated in 2005.

Union and state governments had taken a major policy shift in 2005, when Union government loans to the states were discontinued completely. Central loans to states got completely stopped consequently. The outstanding Union government loans to states had dwindled to negligible levels by 2020-21.

Touting grants given to states ‘for capital expenditure’ (which in many cases is not even spent on capital expenditure) as effective capital expenditure of the Centre is nothing but a further exercise in nameplate swapping for claiming capital expenditure somewhere else as your capital expenditure.

Green bonds might further substitute public sector capex?

The finance minister announced that the government would issue sovereign green bonds in 2022-23. Interestingly, she mentioned that the proceeds of the green bonds would be given to public sector enterprises.

Whatever amount of green bonds are raised by the government, it would most likely substitute the borrowing of entities like NHPC, IREDA, NTPC etc. to that extent. Green bonds borrowing and its transfer to the public sector entities would enhance the Central government capex but there would not be any increase in overall capital expenditure.

Also Read: Budget 2022’s Big Infra Push May Flag in Face of Global Inflation

Capex substitutions signify further quality dilution in capex expenditures

The capex substitution by the government in the Budget 2022-23 does not auger well for the quality of capex as well.

Indian policy has, over the years, killed private investment in the road sector. Private investment in the road sector earlier came when the road concessions were awarded on a BOT (build, operate and transfer) basis.

The public capex support was only to the extent of viability gap funding with the rest being raised by the private entrepreneurs from the market. For the road projects which did not require any viability support, the entire investment in road construction was pumped in by the private sector.

For the last decade or so, there are hardly any BOT projects in the country. All road projects are fully funded by the government whether these are on EPC (engineering, procurement and construction), where the government meets full cost upfront or on hybrid annuity model (where part of the cost is paid overtime in the form of annuity).

NHAI raised a good part of the financing from the market for part-funding the government cost of these projects. However, over the years, NHAI had become a highly debt-burdened organisation.

The fact that the government has decided to provide the entire capital expenditure programme of Rs 1,34,015 crore from its budget signals the death of NHAI as a financially viable entity.

The national highways construction programme in the country has become totally dependent on government expenditure.

The finance minister’s argument that by increasing the capex, the Union government was creating conditions for crowding in more private investment could not have sounded hollower in the facts of the case.

Subhash Chandra Garg is former economic affairs and finance secretary, Government of India

The finance minister’s argument that by increasing the capex, the government was creating conditions for crowding in more private investment could not have been hollower in the facts of the case, writes former finance secretary Subhash Chandra Garg.