As a share of GDP, it has fallen 50 bps for 14 states
With most private sector firms over-leveraged and not in a position to spend on capex, the onus is now on the central and state governments to spend on capacity-creation. Constrained by the need to rein in the deficit at 3.5% of GDP, the Centre has budgeted for a capex of R2.47 lakh crore in FY17, marginally above the current year’s R2.37 lakh crore. If that wasn’t disappointing enough, a glance at some of the budgets put out by state governments shows the states aren’t likely to increase spends meaningfully either. Given they contribute about half the total spends, it is crucial that states chip in, but going by their budgets, FY17 isn’t likely to see any big spending. Economists at Kotak Institutional Equities (KIE) reckon capex as a share of GDP—for a clutch of 14 states—will fall to 2.8% from 3.3% in the current year.
To be sure, a couple of large public sector entities such as NHAI and Indian Railways have outlined some big plans and should have no trouble mobilising the resources to implement these. However, not too many PSUs can hope to spend on capex given they are cash-strapped. Bloomberg consensus estimates suggest the set of the 16 top PSUs will close FY16 with smaller profits—down 5% over FY15. Also, while cash-flows may appear robust—in the nine months to December, cash flow equivalents are up 14% y-o-y—much of the surplus comes from oil marketing firms BPCL and IOCL, and at least four companies are tipped to report a fall in cash-flows this year. While large PSUs such as ONGC will continue to spend, the incremental amounts aren’t anything to write home about.
It is a tough situation because unless growth gains momentum, state governments may not be able to muster the resources for capital spends in FY18 either. Many missed their FY16 fiscal deficit targets, and that too in a year when they got more than what was due from the Centre by way of tax devolutions. Economists at HSBC estimate, the collective defict for 18 states, slipped to 2.7% from the budgeted 2.6%, necessitating some capex cuts. With states expected to implement the Pay Commission in FY17-FY18, apart from the interest to be paid on the UDAY bonds, FY17 expenses will mount, leaving the deficit higher and capex spends modest. In fact, economists say some states might overshoot their fiscal deficit targets next year—the aggregate for 17 states is pegged at 2.9% of GDP—since expenses appear to have been under-estimated. Looks like it could be a while before the investment cycle turns.