The financial year 2024-25 (FY25) started with a slow pace in capital expenditure (capex) due to the focus on the general elections earlier this year. Both state governments and the Centre experienced delays in spending on infrastructure projects, resulting in a sluggish start to the fiscal year. However, experts, including the rating agency ICRA, foresee a recovery in capital expenditure in the second half (H2) of FY25, although significant efforts will be required to meet the budgeted targets.
According to ICRA, data from 15 major states indicates that combined revenue receipts, revenue expenditure, and capex will need to increase by 30%, 26%, and 40%, respectively, in the second half of the fiscal to meet the annual targets set in the budget. This suggests that the government faces an uphill task in ramping up its spending to achieve the ambitious goals set for FY25. The initial slowdown in capex was attributed to the focus on elections, which diverted attention and resources away from infrastructure projects and other capital expenditure initiatives.
ICRA’s report highlights that the recovery of capex in the second half will be essential to meet fiscal goals. The government must significantly ramp up its spending in the months ahead to bridge the gap. Given that the first half of FY25 did not witness the anticipated pace of capital spending, the second half will need a substantial push. The forecast suggests that the government will need to increase its capex by as much as 40-52% between October and March to stay on track. This would be a tall order, requiring accelerated efforts across the board to drive forward projects that have been delayed and to initiate new ones that can inject momentum into the economy.
This recovery in government spending is crucial as the economy faces growing challenges, including a general moderation in domestic consumption demand. Consumption, which has been one of the key drivers of economic growth, has shown signs of weakening, and other indicators of growth have also flagged. This means that government spending could play an even more critical role in stimulating economic activity in the second half of the year. Without a significant increase in capital expenditure, the economic growth targets for FY25 could remain out of reach.
The potential for a pickup in government spending comes at a time when the economy requires a strong injection of stimulus. Increased capex has the dual benefit of stimulating demand in the short term while also improving the country’s infrastructure, which can have long-term benefits for economic growth. The government’s ability to fast-track key projects, including those related to roads, railways, and other critical infrastructure, will be instrumental in boosting economic momentum in the second half of the fiscal.
However, meeting the capex targets will not be an easy task. The required 40-52% increase in capital expenditure in just six months is a significant challenge. While the government is expected to push for higher spending, the pace of recovery will depend on various factors, including the efficiency of project execution, the availability of resources, and the coordination between central and state governments. If the government can overcome these hurdles, the necessary acceleration in spending could help prevent a further slowdown in the economy.
ICRA’s analysis underscores the importance of fiscal discipline in ensuring that the budget targets are met. The agency has pointed out that the overall fiscal performance of states and the Centre is heavily reliant on increasing capital expenditure in the second half of FY25. Given the current state of the economy, achieving this target will require significant efforts from both the government and the private sector to drive forward investments and projects.
The slow start to capital expenditure in FY25 is not entirely unexpected, given the distraction of the general elections that took place earlier in the year. During election periods, the focus of both state and central governments shifts toward political campaigns, which often leads to a delay in the execution of economic and infrastructure projects. Election-related expenditures, along with political uncertainty, also tend to limit the capacity for significant fiscal spending. Consequently, both states and the Centre found it challenging to meet the expected capex targets in the first half of the financial year, leading to concerns about whether the annual goals could still be achieved.
The second half of FY25, however, offers a window of opportunity for recovery, with expectations of increased government spending on infrastructure and other capital projects. As the elections are over and political stability returns, the government is now in a better position to channel resources into developmental work. This recovery could be a game changer, as it would signal that the government is committed to driving growth even when other economic indicators are showing signs of weakness. However, it is important to note that this surge in spending needs to be strategic and targeted to ensure that funds are efficiently used to maximize economic impact.
The government’s push for increased capex in the second half of FY25 will likely focus on critical sectors such as infrastructure, healthcare, and renewable energy. These areas not only hold the potential for immediate job creation and economic activity but also align with the long-term goals of sustainable development. For instance, road and rail projects, which have long gestation periods but offer high multiplier effects, could provide an immediate boost to the economy. Additionally, spending on health and energy infrastructure is expected to have a lasting positive impact, making these investments crucial for the country’s economic resilience.
Another factor that could drive the recovery in capital expenditure is the government’s efforts to reduce bottlenecks in project implementation. Over the years, delays in project execution have been a recurring challenge. Bureaucratic hurdles, land acquisition issues, and coordination problems between different levels of government often result in projects being stalled or completed behind schedule. To overcome this, the government has been actively working on reforms to speed up the approval and implementation processes. If these reforms succeed in clearing the way for faster execution, the capex targets could be met more efficiently.
Moreover, the role of public-private partnerships (PPPs) in accelerating capital expenditure cannot be overlooked. The government has been increasingly turning to private sector investments to supplement public funding for infrastructure development. By offering incentives and facilitating smoother regulatory processes, the government aims to attract private players to invest in sectors such as highways, ports, and airports. These partnerships can help mitigate the financial burden on the government while still ensuring the necessary investments are made to spur economic growth.
While the government remains optimistic about the potential recovery in capital expenditure, the challenge lies in maintaining the momentum through the second half of FY25. The economy’s growth trajectory is influenced by many external and internal factors, including global economic conditions, domestic inflationary pressures, and geopolitical tensions. Any setbacks in these areas could have a cascading effect on government spending plans. Therefore, the government’s ability to navigate these challenges and effectively mobilize funds for capex will be crucial.
In addition, the state governments will also play a pivotal role in this recovery. While the Centre can provide the necessary financial support, states must actively implement their own projects and use the funds allocated to them effectively. The performance of state governments in this regard will directly impact the overall capex numbers, and it will be essential for them to step up their efforts to meet targets. States that manage to implement projects efficiently will not only contribute to the national goal but will also benefit from the economic growth that follows.