The central government’s capital spending in 2024-25, according to the interim budget will be ₹11,11,111 crore, a number which is more like an auspicious figure than a hard-headed budgetary allocation. Beyond this, perhaps numerologically significant , allocation, the message is clear as far as Narendra Modi government’s fiscal priorities are concerned. The government will continue its capex push if elected after the general elections. While a growing tax-GDP ratio will help this pursuit, capex will also be given a larger slice of the overall spending pie of the central government.

Read here: Interim budget 2024-25: Govt stays the course on fiscal consolidation path

Fiscal numbers of the second Narendra Modi government speak for themselves. The share of capital spending in total expenditure of the central government has increased from 12.5% in 2019-20 to 23.3% in the 2024-25 interim budget. In terms of share in GDP, the respective numbers are 1.7% and 3.4%. The overall capital spending push, as seen in the effective capex is even greater. This has increased from ₹5.2 lakh crore to ₹15 lakh crore during this period.

“While revenue expenditure is expected to be flattish, rising only 3% y/y, amid a falling subsidy bill, capital-expenditure growth remains the key priority, growing by 11.1% over prior budget estimates for FY2023-24”, Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays said in a note.

How big is the 3.4% capex share of GDP? It is the highest capex (as a share of nominal GDP) since 2004-05, irrespective of which GDP series (the old 2004-05 series or the new 2011-12 series) one uses as the base. How big a role has the central government’s capital spending played in supporting overall economic growth? The share of investment (represented by Gross Fixed Capital Formation or GFCF) has increased to 34.9% of real GDP in FY24, the highest in the 2011-12 series of GDP. To be sure, Union government capex is only a fraction of this investment. Although highest in the new series of the GDP, it was only 10.8% of nominal GFCF in FY24, but what makes it important is the fact that it has come at a time when private investment is still tentative and consumption is still chasing a broad-based recovery. “At 3.4% of GDP, public capex is positioned to continue its innings as one of the key drivers of growth”, Aurodeep Nandi, India Economist, Nomura said in a note.

This year’s budget also makes a new leap in pushing for capex over and above what the central government is spending. Not only has it continued the practice of offering interest free loans to the states subject to them meeting certain conditionalities (reform related ones), it has also invited the private sector to take up research and development spending by offering interest-free loans from a ₹1 lakh crore corpus for a period of 50 years. Similarly, it also speaks about bilateral investment treaties with foreign countries being in the works; and a day before the budget, the government reduced customs duties on mobile phone components. The latter policy tweak has the potential to sweeten the environment for foreign manufacturers locating to India under the Production Linked Incentive Scheme (PLI) route. Similarly, the budget offered incentives for investment in renewable energy sectors by announcing measures such as viability gap funding in harnessing offshore wind energy.

Whether or not these policies give a fillip to private investment and subsequently private demand remains to be seen. For now, the government can rightfully claim that it is prioritizing long-term growth over short-term fiscal stimulus.