RBI bonanza may help Centre to push capex further this year

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The unexpected Rs 2.11 lakh crore dividend bonanza by Reserve Bank of India could enable the Centre to raise capital investment in the current financial year by 8-10%, a finance ministry official has told The Economic Times. The capital expenditure budget announced on February 1 in the interim budget was Rs 11.11 lakh crore, a record allocation under this head. The RBI dividend could be utilised by the new government to announce an even higher allocation in the full budget to be placed sometime in July.

Buoyant tax revenue would also help the cause of capital expenditure that has triggered growth rate in the economy, particularly when private capex did not pick up to the desired extent. “Both tax and non-tax revenue are expected to be better. Additional surplus transfer from RBI provides enough headroom to spend more,” a senior bureaucrat told the newspaper.

While the government might use a part of the kitty to boost capex in FY25, it was not thought feasible just after the interim budget when the capex push made headlines.

“There are limits to the government’s ability to keep expanding capital expenditures. There are fiscal limits, and we will adhere to prudent limits. So, it will be what it will be. It cannot be a continuous substitute for the private sector,” Union finance secretary T V Somnathan had told the media.

The Centre raised capex by quantum amounts in this decade. It hiked capex allocation by 42% in FY22 and 24% in FY23. The rate came down to 11.1% in the interim budget this year but comprised 3.4% of the GDP.

While capex in the public domain is a necessity for growth and asset creation and paving the way for private capital expenditure, fiscal consolidation constraints pull the government in the opposite direction. The government wants to bring down fiscal deficit to 5.1% in the current financial year from 5.8% in FY24. The 5.8% figure is the revised estimate and the final number will be announced in end-May.

“It is not possible to match large increases of past few years in capex growth but some additional support can be provided,” the official told the newspaper.

The Union finance minister cited a National Institute of Public Finance and Policy (NIPFP) study and said that each rupee spent on capital expenditure in India increases economic output 4.8 times.

Referring to the capital expenditure by the Centre this year, Madan Sabnavis, Bank of Baroda chief economist said, “A single-digit hike is fine and even fiscally viable. Capex growth of 20-25% would not make much sense, so a tapering down is both evident and required.” Sabnavis said that improved tax revenue and dividends from public sector enterprises may offer the government elbow room for managing any rise in subsidy bills apart from giving headroom to manage the fiscal deficit.

Interestingly, global rating agencies have already indicated that if the government uses the RBI dividend to bring down fiscal deficit fully, it would help the country to try for better sovereign rating. An S&P analyst made this comment to the media soon after the RBI announcement.

In May 2023 S&P Global Ratings affirmed India a BBB- rating outlining weak fiscal scenario and low per capita GDP as risks.