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Wednesday, 14 December 2016 04:11
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Shobhana's edit

Centre needs to up spending on projects

With demonetisation expected to hurt tax revenue collections, at least for the three months to December, states might need to curtail their planned capex spends for the current year. A clutch of nine states—which account for 60% of GDP—had bugdeted for an increase in capex of around 15.8 % in the current year, after adjusting for the debt arising from the UDAY scheme. However, ratings agency ICRA now expects the increase in capex might be restricted to a more modest 9-10%. This is primarily because revenues—for a clutch of nine states—are expected to slow down missing the target of a 12.5% rise for FY17. The acute shortage of cash is likely to cripple businesses across the country, especially those in the small- and medium-scale sector dampening this growth to anywhere between 9% and 11%, ICRA estimates. Although states were spending at a brisk pace in the first couple of months of FY 17, the momentum appears to have waned; H1FY 17 has seen capex spends of eight states rise by a very anaemic 7% y-o-y—which is why it is hard to see spends rise more than 10% for the full year.

That’s unfortunate since investments—as measured by gross fixed capital formation—have contracted three quarters in a row now. GFCF clocked -1.9% in the March quarter, -3.1% in the June quarter and -5.6% in the September quarter. Some part of this is because the Union government hasn’t been investing too much—central capex fell 16.4% in Q1FY17, and although it picked up pace in the July-September period, to 5.3% y-o-y, it was nevertheless disappointing.

However, it is possible that investments could see more traction with the Centre’s tax collections having risen a robust 24% y-o-y between April and October, to Rs 5.3 lakh crore. That is way above the projected 12% for FY17, and will leave the government with enough room to roll out some infrastructure projects in the next couple of months.

There is little risk of the Centre not reining in the fiscal deficit at 3.5% of GDP since the buoyancy in taxes is expected to sustain on the back of higher income taxes after the sharp hike in salaries of government employees. Moreover, the two income disclosure schemes are expected to net the government a meaningful sum. Indeed, given private sector investments too have been stagnating, it is important the Centre is able to kickstart some large projects.


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