Is the capex-based growth narrative losing steam? Ex-Finance Secy Subhash Chandra Garg answers

THE EIGHTH consecutive Budget presented by finance minister Nirmala Sitharman on February 1 has two conspicuous features — absence of capital expenditure and the loud presence of income tax concessions to ‘middle class’. It was stunning not to see, unlike the previous five Budget speeches, any mention of the government’s ‘capital expenditure (capex)’, always glowingly spoken of as the driver of the country’s economic growth. The minister enlivened what was otherwise a lacklustre and routine Budget by making the big announcement to please the ‘middle class’ by making annual income up to ₹12 lakh tax-free and reducing the tax burden of thousands others by pushing the highest tax slab of 30% for incomes above ₹24 lakh. While her silence on capex reflects the government’s acknowledgment of the limited success of India’s public capex-led growth story, the new found eloquence over ‘middle class’ unleashes a new political tool to pull middle class votes towards the ruling party. The government also expects to boost consumption by putting more money into people’s hands. Capex is past, consumption is the new lode star, Union Budget 2025-26 seems to suggest.

Lagging capex

The allocation for capex in Budget 2025-26 is ₹11.21 lakh crore, just 0.9% higher than the Budget 2024-25 capex of ₹11.11 lakh crore. True, it is 10.1% more than the revised 2024-25 capex estimate of ₹10.18 lakh crore, but that’s because the 2024-25 capex has been revised down by about ₹1 lakh crore.

A closer look at the 2024-25 capex story will show that the ₹1.81 lakh crore capex in the first quarter was 35% lower than in the same quarter of 2023-24. It improved in the second quarter but it was only during the third quarter that the government managed to pump in large funds (₹2.7 lakh crore) to bring the nine-month capex growth in the positive territory. A significant portion of this amount went into pre-paying National Highways Authority of India’s (NHAI’s) loans and lending to states, both of which, strictly speaking, did not lead to any construction activity on the ground and, hence, had very less ripple effect on the economy. Similarly, there is ample evidence to suspect that a good portion of capex loans released to states are also un-utilised. If you exclude the road capex used for repayment of NHAI loans and unutilised loans and advances lying with states, the actual capex of ₹6.85 lakh crore in the first nine months of 2024-25 would be about a ₹1 lakh crore less than the capex during the same period in 2023-24.

The ability of several other capex allocations for 2024-25 to kick-start the economy was also doubtful. For instance, of the ₹84,496 crore set aside as telecommunication capex in the 2024-25 Budget, ₹82,916 crore was for infusing equity capital in BSNL for cleaning up accumulated losses and 5G licence fee. The absence of capex utilisation led to a downward revision in the allocation and explains no significant jump in capex in the current 2025-26 Budget. This year, allocations to roads and railways, both major capital spenders, have remained the same as in the previous year’s Budget. Among the other major capex allocations, ₹20,000 crore is for a new Research, Development and Innovation (RDI) Scheme under the Department of Science and Technology. It is highly unlikely that the RDI scheme would be rolled out in 2025-26. Massive under-performance in 2024-25 capex, marginal increase in 2025-26 allocations and absence of new ideas about capex are weakening the Centre’s capex-based growth narrative.

Consumption gamble

The most talked about part in Budget 2025-26 is no tax on income up to ₹12 lakh per annum and lower tax rates for incomes up to ₹24 lakh in the new tax regime. The government claims the tax relief to the middle class will result in a revenue loss of about ₹1 lakh crore to the exchequer. It was definitely a much needed move as India’s tax-exemption threshold of ₹3 lakh under the new scheme (₹2.5 lakh under the old scheme) was awfully low. The tax slabs were also not tax payer-friendly as the maximum tax slab (30%) tax kicked in from ₹15 lakh under the new scheme (₹10 lakh under the old scheme). Both have been revised for good. The minimum threshold has been raised to ₹4 lakh and the 30% slab now kicks in at ₹24 lakh. Even if ₹1 lakh crore is reaching the hands of these taxpayers as additional disposable income as claimed by the finance minister, can it significantly add to the private final consumption expenditure, which was ₹200.30 lakh crore in 2024-25?

What will trigger consumption growth? Income tax concession or rise in income? Economic Survey 2024-25 says real earnings of regular wages/salaried workers reduced between 2017-18 and 2022-23, for males from ₹12,665 per month to ₹11,858 per month and for females from ₹10,116 per month to ₹8,855 per month. In case of self-employed workers, it declined from ₹9,454 per month to ₹8,591 per month for males and from ₹4,348 per month to ₹2,950 per month for females. For the unfortunate female self-employed workers, even nominal earnings declined from ₹5,935 per month to ₹5,497 in this period. Regular wage/salaried earning workers constitute approximately 20% of India’s 65 crore-strong workforce or 12-13 crore workers. Can their declining real earnings be compensated by the income tax concessions?

No doubt there will be a significant section of taxpayers who will benefit from the finance minister’s tax concessions. But they will be a fraction of even India’s middle class. These concessions will not impact consumption patterns of the vast majority of Indian people. Both getting out of the capex push and pumping money into the hands of consumer through income tax sops may not be great ideas. Hope that’s not the plan.

(The writer is also the author of The $10 Trillion Dream Dented and Explanation and Commentary on The Budget 2024-25)

(Views are personal)