The Indian government is gearing up for a potential spending boost! The Union government's capital expenditure budget might soar to a whopping Rs 12.5 lakh crore in FY27, a significant increase from the previous years' Rs 11 lakh crore. But why the sudden hike? Is it a wise move?
In a time of global economic uncertainty, especially with the US tariff actions looming over exports and private investment, the government aims to support domestic economic activity. This counter-cyclical approach is a strategic move to stimulate the economy when external factors threaten growth.
Interestingly, the government aims to maintain a capex-to-GDP ratio of around 3%, a fiscally responsible decision. This ratio is akin to the FRBM Act's 3% fiscal deficit benchmark, ensuring a balance between spending and financial prudence. In FY26, the capital expenditure is estimated to be 3.14% of GDP, and with the projected increase, it might reach 3.18% in FY27.
Here's where it gets intriguing: officials hint at a 10-15% capex outlay rise in FY27, a change after two years of stability. But what's driving this decision? The Scheme for Special Assistance to States for Capital Investment (SASCI) might be the key.
The SASCI, a grant-like program, offers 50-year interest-free loans to states for capital spending. With private capex being uneven and states facing fiscal constraints, this scheme has become a vital tool for the Centre's investment strategy. However, the budget for SASCI has remained unchanged for two years, leading to states' pleas for an increase.
Economists largely agree with this strategy. Aditi Nayar, ICRA chief economist, predicts a Rs 20,000-30,000 billion boost in FY26 capex, followed by a 14% growth in FY27. She attributes this growth to an increased outlay for the capex loan scheme for states, allowing spending in areas under state jurisdiction.
N.R. Bhanumurthy from the Madras School of Economics and Madan Sabnavis, Bank of Baroda chief economist, also advocate for a higher allocation to SASCI. However, Sabnavis notes that the actual increase in FY27 will depend on states' utilization of funds in FY26.
But here's a twist: India Ratings chief economist Devendra Kumar Pant expects the Union government's capex outlay to stay around 3% of GDP in FY27. He highlights the states' role in driving infrastructure investment, suggesting that the multiplier effect is higher at the state level.
So, will the government's strategy pay off? Is increasing the capex budget the right move? What do you think? Share your thoughts on this economic conundrum!
