In Search Of An Investment Cycle

M Govinda Rao, chief economic advisor at Brickwork Ratings shared that view.

“There is a tendency to take in too many projects without resourcefulness causing huge time and cost overruns. There is need for sequencing and allocation of money to complete existing projects,” Rao said.

The projects chosen for execution and hence the quality of funding are also important factors. In a recent speech, the RBI governor called for quality parameters to monitor fiscal spending.

No one will deny the need for building in quality parameters in public investment, said R Nagaraj, visiting professor at the Centre For Development Studies. “How well is it done, I do not know.” Introducing quality parameters may be of little help, added Roy.

The rising share of states in capital expenditure is another reason why central government capex spends alone cannot ensure economic dividends.

The amount of capital spending with the central government is very little, said Rao. “Much of it comes from states.”

According to data from the Reserve Bank of India’s State Finances Report for 2021-22, states are estimated to spend Rs 7.23 lakh crore on capital expenditure in the current year, compared to the central government’s planned spend of Rs 5.54 lakh crore.

States, however, often cut back on capital spending during the course of the year to meet fiscal targets. In 2020-21, according to the RBI, states cut capex in key social and economic services like water supply and sanitation, medical and public health, irrigation and flood control, transport and rural development. “This experience underscores the importance of raising additional resources at the sub-national levels,” the RBI report said.

A BloombergQuint analysis of capital expenditure of ten major states in the April-September period, showed that they had used only 33.7% of the budgeted capital spending over this period, while the central government spent 41.4% of its budget.

“States’ capex constitutes over 60% of overall government capex spending. Many infrastructure spends, such as on health, education, irrigation, and rural development, energy are largely from state capex,” said Devendra Pant, chief economist at India Ratings & Research. Take mobility for instance, feeder roads built by states enable connectivity and commute and form an important aspect of the region’s development, Pant explained.

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