Budget 2024: Capex unchanged, but govt maintains strong fiscal support for infra over the next 5 years

New Delhi: The Union government will maintain central capital expenditure at the levels proposed in the interim budget, finance minister Nirmala Sitharaman said on Tuesday. The budget also encouraged more private sector investments and infrastructure allocations by states through central government support.

Stating that capital expenditure would be ₹11.11 trillion or 3.4% of GDP this fiscal, Sitharaman said, “Significant investment the central government has made over the years in building and improving infrastructure has had a strong multiplier effect on the economy. We will endeavour to maintain strong fiscal support for infrastructure over the next five years, in conjunction with imperatives of other priorities and fiscal consolidation."

Ranen Banerjee, partner and leader-economic advisory at PwC India, said the unchanged capex allocation was expected as the ability of the government to spend and that of the capex ecosystem to absorb more than this allocation was constrained.

“We had a slower Q1 spend owing to elections, and Q2 spend on capex is always slow owing to monsoons impacting construction activity,” Banerjee said. "The government should be commended if the allocation made for capex, which is 17% higher than the provisional actuals in FY24, is spent in FY25.”

According to Infrastructure Year Book 2023 released by ratings agency Crisil, India will spend ₹143 trillion on infrastructure between fiscal years 2024 and 2030, more than twice the ₹67 trillion spent in the past seven financial years from 2017.

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Focus on private investments

The focus of capital investment in infrastructure will now shift to private sector investment, which will be promoted through viability gap funding (VGF) and other enabling policies and regulations, the finance minister said while presenting budget proposals for 2024-25 in Parliament.

She said a market-based financing framework will be brought out by the government. This is expected to address the huge funding needs that the private sector will need for infrastructure development.

The Economic Survey 2023-24, published on Monday, also suggested bringing more private capital to the sector for India to continue on the path of building quality infrastructure.

Apart from central support and private sector push to infra, the Centre would also nudge states to increase their funding support to the sector, subject to their development priorities. To support states, the budget has increased provision for long-term interest-free loans to states to ₹1.5 trillion from ₹1.3 trillion in the interim budget. 

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“The substantial allocation for capital expenditure and long-term interest-free loans to states reflects a forward-thinking strategy aimed at stimulating economic growth and innovation," said Kavita Shirvaikar, acting managing director, Patel Engineering Limited. "Encouraging private sector participation through VGF and market-based financing frameworks will foster a dynamic environment for infrastructure advancements.”

The government has stepped up its infrastructure capex budget in recent years. The ₹11.11 trillion budgeted for in FY25 is an 11.1% rise from the previous year's capex of ₹10 trillion. The capex had increased 37% in FY24, 24% in FY23, and 40% in FY22.

Affordable housing

In addition to the capex support, the budget also announced a number of measures for affordable urban housing. 

Budget housing in large cities has been largely ignored amid the ongoing residential boom in the country. Accordingly, under the Pradhan Mantri Awas Yojana Urban 2.0, the housing needs of 10 million urban poor and middle-class families will be addressed with an investment of ₹10 trillion. 

This will include ₹2.2 trillion of central assistance over the next five years. Plus, the return of interest subsidies is expected to support the affordable housing segment that has faced many challenges.

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Other capex allocations

The budget also announced an allocation of ₹16,100 crore towards the Pradhan Mantri Grameen Sadak Yojana (PMGSY) to improve connectivity in rural areas. The PMGSY will launch its phase IV programme to provide connectivity to 25,000 rural habitations.

A higher capex is largely proposed for infrastructure sectors such roadways, shipping, and railways. The capital allocation for these infrastructure-focused ministries has also been scaled up moderately in the budget, allowing them to complete work under the Vision 2027 plan.

While the capital allocation for ministry of road transport and highways has moved up from ₹2.64 trillion (revised estimates FY24) to ₹2.72 trillion in FY25, it has risen from ₹2.4 trillion to ₹2.52 trillion for the Railways. These allocations for FY25 are also unchanged from the interim budget allocations.

For manufacturing of ships (vessels) under the Atmanirbhar Bharat initiative, customs duty has been waived for components and consumables required for manufacture of vessels. Also, duty on technical documentation and spare parts for construction of warships have been brought down to nil.

In addition, the budget has proposed that ownership, leasing and flagging reforms will be implemented to improve the share of the Indian shipping industry and generate more employment. Second, considering the tremendous potential for cruise tourism in India, the budget proposed a simpler tax regime for foreign shipping companies operating domestic cruises in the country.

Capital spending by the government has been on the rise for the past few years even as private investment remained tepid during the pandemic. With capex reaching 3.4% of GDP now, the government believes that this level of central funding should be maintained over the medium-term while the private sector should step up their share to strengthen the country’s infrastructure.