Actual Spending on Key Projects May Fall Short of Promises

Newsreel Asia Insight #24
Oct. 25, 2023

Imagine your family has a budget for home improvements—things like fixing the roof, upgrading the kitchen, or building a new garage. Now, what if someone in the family proudly announced, “We’ve tripled our budget for improvements!” but then used the money to pay off debts or go on a vacation?

You’d probably feel misled. That’s roughly what’s seems to be happening with the Indian government’s capital expenditure, or “capex,” which is used for projects like railways and roads. In an op-ed published in Deccan Herald, India’s former Finance & Economic Affairs Secretary, Subhash Chandra Garg, suggests that the government’s capex figures are inflated and might not contribute as much to economic growth as one would hope.

In his article, “Hype and reality of Modi government’s capital expenditure,” Garg quotes Finance Minister Nirmala Sitharaman as claiming that the government is investing more in projects that will create jobs and help the economy grow—just like a new garage might increase the value of your home. Sounds promising, right? But Garg, author of “The Ten Trillion Dream” and “We Also Make Policy,” disagrees with the minister.

Here’s the breakdown he provides:

The Smoke and Mirrors: Garg argues that a chunk of the money the government says is for capex is actually loans to states—1638.34 billion rupees in the 2023-2024 “budget and estimate,” or projection of how much money the government plans to spend in a particular financial year. It’s like counting the money you lent to your cousin as a “home improvement.”

Military Spending: Imagine if your family counted enrolling in a high-end gym membership as a “home improvement,” but this membership doesn’t actually add value to your home. Similarly, the government includes military spending–1,991.04 billion rupees–in its capex, which doesn’t help the economy grow.

Bad Investments: What if your family invested in a failing local restaurant, hoping it would turn around, but it keeps losing money? The government did something similar by putting money– 623.65 billion rupees–into struggling companies like Air India and BSNL, counting it as capex.

Funding Switch: Imagine you have two ways to pay for home improvements: (1) From your main savings account where you’ve stashed away cash from your salary (think of this as the government’s own budget, called budgetary capex). (2) From a special fund you’ve built up from a side gig or a loan you took out just for this project (this is like the public sector’s pot, called IEBR, which is money that public sector companies have generated).

In the past, you’ve relied on both pots of money to get the job done. But lately, that special fund isn’t as much as it used to be. So you find yourself dipping more and more into your main savings to cover the costs.

Now, think of this as the Indian government’s recent approach to big projects like railways and roads. A few years ago, the government was using a lot of the public sector’s money to fund these projects—like a family leaning heavily on that special fund for their remodel. But things have changed. Now, it’s using more of its own budget money, like a family using more from its main savings account to complete the house upgrades.

To put it in numbers, the government ended up using 4,192.26 billion rupees from its own budget for railways and roads over the last three years, because the public sectors just weren’t chipping in as much as they used to, Garg points out.

If you are taking a big chunk out of your main savings account because your special fund is running dry, that doesn’t mean your house is receiving more money for its improvement. Similarly, the government has shifted from using other funding sources to using its main budget for projects, making it look like they’re investing more than they actually are, Garg points out.

The Real Picture: After removing all these “creative” elements, the actual money spent on meaningful projects is far less than what is announced. Garg says it’s less than 40% of what the government claims.

Actual Growth: Like noticing that your family isn’t actually fixing up the house as fast as before, the rate at which the government is really investing in growth is slowing down.

When a government promises big capex spending to improve the country but falls short, it affects everyone. Critical projects like new roads, schools, and healthcare facilities may not materialise. Jobs that should’ve been created aren’t.

Every rupee spent on a different project or loaned to another entity is a rupee not spent on genuine improvements. It’s like forgoing the new roof to paint a government office; it doesn’t benefit the people who contributed to the fund in the first place.

In summary, while the government claims to be spending more on things that should make our “national home” better, the reality might not be as rosy as it seems. Perhaps we are being left with a creaky, leaky building and dashed hopes.