Roads

Budget 2021: Govt’s Claim of a Sharp Increase in Capital Expenditure Doesn’t Really Hold

Good analysis takes time.

It’s been three days since the finance minister Nirmala Sitharaman presented the annual budget of the union government and now my brain has really opened up and can see things that it couldn’t earlier.

On February 2, I wrote a piece which basically looked in detail at the fiscal deficit of 9.5% of the gross domestic product (GDP) and why the government’s claim of spending more this year and the next, to become the spender of the last resort and get the economy going again, didn’t really hold.

This piece is basically an extension of the same idea. Ideally, you should read the February 2 piece before you read this. Nevertheless, this piece is also complete on its own and if you are short on time, then just reading this piece should be enough to understand what I am trying to say.

One of the claims made by the finance minister in her budget speech was that the government was increasing the capital expenditure this year and the next. The mainstream media and the stock market wallahs have also tom tommed this line over the last few days. Nevertheless, as my analysis shows, this claim doesn’t really hold to the extent it is being made out to be.

As the finance minister said in her speech:

“In the BE 2020-21, we had provided Rs 4.12 lakh crores for capital expenditure. It was our effort that in spite of resource crunch we should spend more on capital and we are likely to end the year at around Rs 4.39 lakh crores which I have provided in the RE 2020-21. For 2021-22, I propose a sharp increase [emphasis added] in capital expenditure and thus have provided Rs 5.54 lakh crores which is 34.5% more than the BE of 2020-21.”

Let’s try and understand what the finance minister is saying here pointwise. (BE = budget estimate. RE = revised estimate. When the budget is presented a budget estimate is made. When the next budget is presented a revised estimate is put forward).

1) Capital expenditure is basically money spent on creating assets, in particular physical infrastructure like roads, railway lines, factories, ports, etc. Revenue expenditure is basically money spent in paying salaries and pensions, financing subsidies, etc. Over and above this, interest paid on the outstanding debt or borrowings of the government, is also a part of revenue expenditure. In fact, interest payments on outstanding debt are the biggest expenditure in the union budget. In 2020-21, it forms 20% of the total government expenditure and it jumps to 23.3% in 2021-22.

The usefulness of capital expenditure made by the government can be experienced in the years to come as well and it is believed that it adds to economic activity more than the revenue expenditure. Hence, economists, journalists and policy analysts, while analysing the union budget like to look at the money that has been allocated towards capital expenditure.

2) In 2019-20, the government spent Rs 3.36 lakh crore on capital expenditure. In 2020-21, it is expected to end up spending Rs 4.39 lakh crore, which is 30.7% more. But the thing to understand here is that when the government presented the budget for this financial year in February 2020, it had already budgeted to spend Rs 4.12 lakh crore or around 22.6% more.

It is worth remembering that when the budget for this financial year was presented, the fear of covid and the negative impact it would have on the economy, hadn’t been realised as yet. In the aftermath of covid, the capital expenditure went up from the budgeted Rs 4.12 lakh crore (or the budget estimate) to the revised estimate (RE) of Rs 4.39 lakh crore. Hence, the post covid increase in capital expenditure has been around 6.6%.

Given this, the increase in capital expenditure in 2020-21 had already been budgeted for pre-covid and there was a small increase post-covid. Once we know this, things don’t sound as exciting as the finance minister made it sound in her budget speech.

3) How will things look in 2021-22 when it comes to capital expenditure? The finance minister said that the capital expenditure will grow by 34.5% to Rs 5.54 lakh crore in 2021-22 in comparison to the budgeted expenditure of Rs 4.12 lakh crore in 2020-21.

The question is why would you compare next year’s budget estimate with the current year’s budget estimate when the revised estimate number for the year is already available. You would only do it, if you wanted to show a higher jump. Anyway, the finance minister of a country should be using some better mathematical tricks than such an elementary one.

Also, even when we compare next year’s budgeted capital expenditure with this year’s revised one, the jump is substantial. The capital expenditure will jump from Rs 4.39 lakh crore to Rs 5.54 lakh crore. This is a jump of 26.2%, which looks to be very good.

4) So far so good. The trouble is that the finance minister just spoke about the budgeted capital expenditure of the government in her budget speech and not the total capital expenditure of government. You can click on this and go to page 8 to get the numbers for the total capital expenditure of the government, which are also published in the budget.

The total capital expenditure of the government includes what is in the budget plus internal and extra budgeted resources (IEBR). The IEBR consists of money raised by the public sector enterprises owned by the union government through profits, loans as well as equity, for capital expenditure. It also includes the Indian Railways. This is also a part of government’s overall capital expenditure though it is off-budget and not a part of it.

The total capital expenditure of the government in 2019-20 stood at Rs 9,77,280 crore (It will soon become clear why I am using full numbers and not representing them in lakh crore). The revised estimate for the total capital expenditure in 2020-21 stood at Rs 10,84,651 crore, which is around 11% more. A 11% jump year on year sounds decent.

Nevertheless, one needs to take into account the fact that the budgeted capital expenditure of the union government when the budget for this year was presented in February 2020 had stood at Rs 10,84,748 crore.

As I said earlier, the budget was presented before covid struck. In that sense, the revised capital expenditure of 2020-21 is actually slightly lower than the budgeted one. This again punctures the government’s claim of spending more to get the economy going again post covid. They are spending a tad lower than what they had planned to spend before covid struck.

5) How does 2021-22 look? The government is planning to spend Rs 11,37,067 crore towards capital expenditure. This is 4.8% more than the current financial year. This when the government expects the nominal gross domestic product (GDP), not adjusted for inflation, to jump by 14.4% during 2021-22. The Economic Survey expects the nominal GDP to jump by 15.4%.

Once this is taken into account, it is safe to say that if the government sticks to these numbers, there will be barely any increase in capital expenditure between this year and the next.

Of course, the narrative of the government increasing its capital expenditure has been set. That’s what we have been told over and over again over the last few days. The stock market seems to believe it as well.

This entire exercise also tells you how nuanced numbers can get once you start really digging them up and setting them up in the right context. This is something you won’t see much in the mainstream media. Given this, it is very important that you please continue supporting my writing.

PS: I would like to thank, Sreejith Balasubramanian, Economist – Fund Management, IDFC AMC, whose research note on the budget, helped me think through this issue, in a much better way.

Will a Keynesian Road Building Programme Put India On the Growth Path?

road

When in trouble, politicians and countries go back to the British economist John Maynard Keynes. Keynes in his magnum opus The General Theory of Employment, Interest and Money suggested that the way out of a low-growth or recessionary economic environment was for someone to spend more. In such a situation, citizens and businesses were not willing to spend more, given the state of the economy. So, the only way out of this situation was for the government to spend more on public works and other programmes.

The Indian government has decided to do just that. On October 24, 2017, the finance minister Arun Jaitley, announced a Rs 6.92 trillion ($107 billion assuming one dollar equals Rs 64.7) road building programme for 83,677 km of roads, over the next five years.

Out of this, the Bharatmala Pariyojana is to be implemented with Rs 5.35 trillion being spent on it for building 34,800 kilometre of roads. Economist Mihir Swarup Sharma writes in a column on NDTV: “Bharat Mala” is basically a reworked and updated form of the National Highways Development Programme that is almost two decades old.” The programme has been in the works for a while now. In fact, in an answer to a question raised in the Rajya Sabha, the upper house of Indian Parliament, the government had said: “The Public Investment Board has cleared the proposal for BHARATMALA Pariyojana Phase-I in its meeting held on 16 June 2017.”

In fact, there is nothing new about this. The Narendra Modi government, in the past, has shown a tendency to portray old schemes as new ones.

Let’s leave that aside and concentrate on how this programme will be implemented. The government said that substantial delegation of powers has been provided to the National Highways Authority of India and other authorities and government departments.

Over and above the Bharatmala Pariyojana, roads of length 48,877 km will be built under other current with an outlay of Rs .57 lakhs crores.

This road building should help a significant portion of the one million youth entering the Indian workforce every month, find jobs. A large portion of this workforce is unskilled and semi-skilled and road building projects will help cater to this completive advantage of access to cheap labour, that India has. Just the Bharatmala Pariyojana is expected to create 14.2 crores mandays of jobs, according to the government.

The government plans to raise finance for these road projects through a variety of measures. For the Bharatmala Pariyojana, Rs 2.09 trillion will be raised as debt from the financial market. Rs 1.06 trillion will be mobilised as private investments through the public private partnership. The remaining Rs 2.2 trillion will be provided out of accruals to the central road fund, toll collections of National Highways Authority, etc.

For the other road projects Rs 0.97 trillion will come from the central road fund and Rs 0.59 million will come from the annual budget expenditures of the government in the years to come.

Hence, on paper this sounds like a fool proof idea. The government will build roads. It will employ many people in the process and pay them. This income when spent will spur the businesses as well as the economy and India will grow at a fast-economic growth rate. QED.

Only, if things were as simple as that.

The government plans to build a total of 83,677 km of roads over five years. This implies building 16,735.4 km of roads on an average in each of the five years. Is that possible? Let’s look at the record for the last three years.

In 2014-2015, the government built 4,410 km of roads in total. In 2015-2016, this jumped to 6,061 km in total. In 2016-2017 (up to December 2016), the government had built 4,699 km of roads. This data is from the annual report of the ministry of road transport and highways. A report in The Hindustan Times suggests that in 2016-2017, the government built 8,200 km of roads. If the government has to achieve the road building target that it has set for itself over the next five years, it has to more than double the speed at which built roads in the last financial year. And then maintain it for five years. This, seems like a tall order.

Over and above this, acquiring land to build roads will not be an easy task. Nitin Gadkari, the minister of Road Transport and Highways told the Press Trust of India in an interview that even though land acquisition is “tough and complicated“, “it is not a problem for the ministry as farmers and others were making a beeline to offer their land for the highway projects after enhanced compensation.”

But this is not going to anywhere as easy as the minister made it sound. Take the case of the Delhi-Mumbai Industrial Corridor which was announced almost a decade back. While work has started on it, most of the corridor is still plagued by land acquisition issues.

To conclude, building roads to drive economic growth is a very old idea. In fact, it was put in action even before Keynes wrote about it in an indirect sort of way in The General Theory of Employment, Interest and Money.

While Keynes was expounding on his theory, it was al­ready being practiced by Adolf Hitler, who had deployed 100,000 workers for the construction of the Autobahn, a nationally coor­dinated motorway system in Germany which was supposed to have no speed limits.

Hitler first came to power in 1933. By 1936, the German economy was chugging along nicely, having recovered from a devastating slump and unemployment. Italy and Japan had also followed a similar strategy.

How well will things work out in the Indian context? It will all depend on how well the government is able to execute the building of roads. The good bit is that Nitin Gadkari, one of the better performing ministers in the Modi government, is in charge. The bad part is that good execution is not something India is known for.

The column originally appeared on BBC.com on October 28, 2017.