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The Economy Observer
11 November 2024
General govt. capex contracts 12.7% in 1HFY25
High chances that the govt. may undershoot its FY25 capex target
The Government of India (GoI) continued to focus on improving the quality of expenditure by raising its total capital
spending (including loans & advances, L&As) by 17.1% YoY to INR11.1t in FY25BE. The spending surged 3.3x in just five
years from INR3.4t in FY20. Excluding L&As, the Center’s capital expenditure (capex) has been budgeted at INR9.2t in
FY25BE
(Exhibit 1).
Based on the unaudited provisional data, The Center’s capex declined 13.5% YoY in 1HFY25, achieving
only 39.1% of BEs in 1HFY25, compared to 50% each in the last two years and the lowest during the corresponding period
in the past decade (except 1HFY21,
Exhibit 2).
This, however, was clearly a story of two halves – capex fell more than a third in 1QFY25, while it increased 14.6% YoY in
2QFY25
(Exhibit 3).
Interestingly though, it grew only in Apr’24 and Jul’24, while declining in four of the last six months. One
of the reasons behind slower capex in 1H, thus, could be general elections (which took place in Apr-Jun this year). In any
case, it means that the Center’s capex has to grow by 50% YoY in 2HFY25, following 22% YoY in 2HFY24
(Exhibit 4).
This is
not impossible but certainly a tall task since the Center’s capex growth was < 25% in the last five years (barring FY22, when
it grew 57%) and it averaged ~17% in the last ten years and 29% in the last four years. Therefore, we believe that the
Center’s actual capex this year could be only ~92-95% of BE (INR8.5-8.7t), undershooting the target by INR500-700b.
It is no surprise that such contraction is visible in defense, roads & railways, since they account for 75-80% of the Center’s
capex. Defense capex was down 15.2% YoY and was only 31% of BEs in 1HFY25, compared to a growth of 6.2% YoY and
an achievement of 39% of BEs in 1HFY24. Capex in railways and roads also dropped 4.8% and 10.1% YoY in 1HFY25,
respectively, and were lower at 50-55% of BEs vs. ~60% each in 1HFY24
(Exhibits 5 and 6).
At the same time, capital spending of all states has also more than doubled to INR10.1t in FY25BE from INR4.6t in FY20.
Nevertheless, unlike the GoI, which usually meets its budget estimates (BEs), states’ actual capital spending was only 83%
of BEs over the past decade. Therefore, states’ targets must be taken with a big pinch of salt
(Exhibits 7 and 8).
Excluding loans and advances (L&As), capital expenditure (capex) of all states was budgeted at INR9.2t in FY25BE.
Assuming that states achieve 85% of BEs in FY25 (last 5- or 10-year average was 77-78%), it implies a target of INR7.8t
and muted growth of just 3.7% YoY this year
(Exhibit 9).
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Based on the provisional/supplementary data of 18 states , all states’ capex is estimated to have fallen 11.5% YoY in
1HFY25, reaching 26.7% of BEs, lower than 31.8% in 1HFY24, but in line with 26-27% achieved during the corresponding
period in the past decade (Exhibit
10).
States’ capex declined in four of the six months in 1HFY25; it picked up in Jul’24 and Aug’24 but contracted again in
Sep’24. Consequently, the contraction was modest in 2QFY25 vs. 1QFY25. Our estimates suggest that states’ capex
dipped 20.8% YoY in 1QFY25, followed by a decline of 5.7% YoY in 2Q
(Exhibits 11 and 12).
An analysis of individual states suggests that nine out of 18 states witnessed a reduction in capex in 1HFY25 vs. four in
1HFY24
(Exhibit 13).
Further, as many as seven states have achieved less than a quarter of its annual targets vs. five in
1HFY24
(Exhibit 14).
Overall, the total capex of the general government (GG, Center + states) declined 12.7% YoY in 1HFY25, following a CAGR
of 25% during the corresponding period in the last four years
(Exhibit 15).
Fiscal capex, thus, was only 32.9% of BEs in
1HFY25, compared to an average of ~39% in the last two years
(Exhibit 16)
and lower than the past decade’s average.
It is very likely that fiscal capex will pick up in 2HFY25; however, elections cannot explain such weak growth in 1HFY25,
especially for states. Assuming ~40% YoY growth in the Center’s capex and ~20% YoY growth in states’ capex in 2HFY25,
combined capex could grow about 30% YoY in 2HFY25, following 17% growth in 2HFY24. It would then be 90% of BEs in
FY25, similar to that in the last two years.
These states account for 85-90% of all states’ Budget. The states/UT covered in this report are Andhra Pradesh (AP), Assam (AS), Bihar (BH), Chhattisgarh (CT),
Haryana (HR), Himachal Pradesh (HP), Jammu & Kashmir (JK), Karnataka (KA), Kerala (KL), Madhya Pradesh (MP), Maharashtra (MH), Punjab (PB), Rajasthan (RJ),
Tamil Nadu (TN), Telangana (TS), Uttarakhand (UK), Uttar Pradesh (UP), and West Bengal (WB).
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Nikhil Gupta
– Research analyst
(Nikhil.Gupta@MotilalOswal.com)
Tanisha Ladha
– Research analyst
(Tanisha.Ladha@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.