CHENNAI: Amidst the ongoing slump in private capex (capital expenditure) and the reduction of centre’s public capex by 17.1% during April-July, state governments are boosting their spending. The capital outlay of 16 states (accounting for 69% of the country’s GDP, or gross domestic product, and about 60% of total outlay by states), for which data is available, has risen 29% during the first four months of the fiscal to Rs 46,300 crore compared to full-year budgeted growth of 16%. “This bodes well as the front-loading of capital spending enables the multiplier effect to set in early and boost economic growth during the year,” observers said.
The aggregate capex of 16 states has surged nearly 47% to Rs 56,100 crore, data sourced by Religare Capital Markets (RCML) from the Comptroller and Auditor General (CAG) showed. “This is positive given the sharp cut in central government capex during April-July and the ongoing slump in private capex. Moreover, front-loading capital spending enables the multiplier effect to set in early and boost growth during the year,” analysts at RCML said.
According to an RBI study, the multiplier effect of capital outlay by states is higher than that by the Centre, as it is more growth-inducing. This is because local governments are likely to invest in relatively smaller investment projects with lower gestation lags than projects of the centre.
Moreover, the centre’s expenditure is thinly spread over a large number of programmes and large areas of the country, while state spending is more focused. “Demand in rural and semi-urban areas is likely to get a leg-up from increased state capex, in addition to this year’s good monsoon and state pay hikes,” analysts said.
Maharashtra, Madhya Pradesh (MP) and Gujarat led the list among large states that saw the biggest increase in both capital outlay and capex. Maharashtra topped the list with an over 74% jump in capital outlay and a similar surge in aggregate capex. This was followed by MP (over 46% growth in capital outlay and 41% jump in aggregate capex) and Gujarat (nearly 31% increase in capital outlay and about same growth in aggregate capex).
Though the Centre’s capex declined, revenue expenditure grew at double-digit rates even before the seventh Central Pay Commission payouts have come into effect. “The centre seems to be taking a cautious approach towards capex, which is likely to continue throughout the year, especially once the salary hikes and allowances are effected,” analysts said. “This is likely to hurt growth given that capital outlay has a significantly larger and more prolonged multiplier effect vis-a-vis revenue spends,” they said.
Most lead indicators of private capex, such as stock of projects under implementation, new announcements, order books, capacity utilisation levels and capital goods imports point to a dismal outlook. A recent RBI study on private corporate investments also suggests continued weakness in capex in 2016-17.