‘The FY25 interim Budget carries forward the ethos of public capex a notch higher, thereby bolstering the government’s commitment to high quality spending’
| Photo Credit: REUTERS

India’s economic recovery in the early post COVID-19 pandemic phase was distinctly underscored by a strong performance in exports and domestic investments. While exports benefitted from an easing of global supply chains and a structural pick-up in services exports, domestic investments are a manifestation of the government’s relentless capex push.

The prioritisation of capex continues

As such, India’s investment ratio is estimated by the National Statistical Office to have improved to 29.8% of GDP in the financial year 2023-24 from its recent low of 27.3% in 2020-21. With this, India stands out as the fourth best country (followed by Mexico, Italy, and South Africa) in the G-20 space with respect to an improvement seen in the investment ratio, three years after COVID-19.

The FY25 Interim Budget carries forward the ethos of public capex a notch higher, thereby bolstering the government’s commitment to high quality spending. The budgeted capex by the central government, an important metric for capacity creation in the economy, is slated to touch a record high of ₹11.11 trillion in FY25. As a ratio to GDP, this would tantamount to 3.4% of GDP, the highest in the last two decades. As a share of total expenditure, this comes to 23.3%, the highest in 32 years

Out of the budgeted capex outlay of ₹11.11 trillion, nearly two-thirds is earmarked for economic services (the lion’s share of approximately 46% is accounted for by hard infrastructure sectors such as roads and railways. In case of the railways, the Finance Minister has announced the identification of three major economic rail corridors under the PM Gati Shakti programme to improve logistics efficiency and reduce cost; energy, mineral and cement corridors; port connectivity corridors; high traffic density corridors, and 40,000 normal rail bogies will be upgraded to meet Vande Bharat standards

Defence capex, a niche priority segment under the Atmanirbhar Bharat campaign, will see a record high allocation of ₹1.72 trillion (although it is budgeted to remain unchanged at 0.5% as a ratio to GDP between FY24 and FY25). This will be supplemented with the launch of a new scheme for strengthening deep-tech technologies for defence purposes and expediting ‘atmanirbharta’.

Loans and advances (form of capital transfers) is budgeted to jump to ₹1.71 trillion in FY25, implying a 20% annualised growth. This will enable States to continue marching in lock step on capex creation at the ground level. After all, States play an equally important role in the creation of regional infrastructure — on an annualised trailing basis, States had a share of approximately 44% (as of December 23) in general government capex.

A tango with the capex push

While the focus on hard infrastructure is easily palpable, the government has also been active in pushing forward its inclusion agenda with interlinkages with the infrastructure sector. In this context, despite its limitations, the FY25 Interim Budget has placed an adequate and timely emphasis on the housing sector. With the target of three crore houses for PM Awas Yojana (Grameen) being nearly met, the Finance Minister expanded the scope to include two crore additional houses in the next five years. This has the potential to boost affordable housing, which in turn would support rural infrastructure demand.

Further, the capex thrust is also seen to be integrating the government’s green energy ambitions. As per the FY25 Interim Budget, one crore households would obtain 300 units of free electricity every month through rooftop solarisation. While each household is expected to save between ₹15,000 to ₹18,000 annually, this would help in the creation of solar assets, especially in rural parts of the country.

Some weak spots in the capex story

Notwithstanding the unambiguous policy focus on government capex, there seems to be a slowdown in capex spending by public sector enterprises (PSEs). The PSE capex budget for FY24 has been axed from ₹4.88 trillion in initial Budget estimates to ₹3.26 trillion in the revised estimates. This will result in PSE capex contracting by approximately 10% in FY24. Going forward, PSE capex is budgeted to increase modestly to ₹3.43 trillion in FY25, implying a growth of approximately 5%. As a ratio to GDP, PSE capex is slated to moderate to 1.0% in FY25, the lowest in recent history.

The high point of this Budget is fiscal consolidation. While subdued PSE capex takes away some sheen from the overall capex thrust by government agencies, this is getting compensated by the better-than-expected pace of fiscal consolidation — the FY25 Interim Budget has pegged the fiscal deficit target at 5.1% of GDP, lower than the consensus expectation of 5.3%-5.4%.

With gross g-sec borrowing now slated to moderate to a three-year low of ₹14.13 trillion, the private sector would benefit from better availability of lendable resources, hopefully at a lower rate (the 10Y g-sec yield closed 8 bps lower at 7.06%, its lowest levels in six months). This would bring collateral benefits to the overall economy. Fiscal rectitude and conservatism have been the hallmarks of this government’s Budget making.

Vivek Kumar is Co-Head, Research, QuantEco. Shubhada Rao is Founder, QuantEco

Watch | One crore households to get 300 units free electricity every month through rooftop solarisation

Taking cue from Prime Minister Narendra Modi’s assurance following the Ayodhya temple consecration that one crore households will be electrified via rooftop solar installations, Union Finance Minister Nirmala Sitharaman in her Interim Budget 2024-25, reiterated that commitment. “Through rooftop solarisation, one crore households will be enabled to obtain up to 300 units free electricity every month…. this would translate to benefits of ₹15,000-18,000 annually for households from free solar electricity and selling the surplus to the distribution companies,” she said in her address.

The average all India household consumption of electricity is about 100 units a month, with only few States such as Delhi approaching close to 300 units, suggest public data. The net-metering policy allows users of rooftop solar power to supply their surplus power back to the grid and thus offsetting their electricity bills.

Budget 2024 updates

Whether the government would fund new installations or only subsidise those installing new ones — the latter has been a practice for years — and the demographic that the scheme was targeting was not specified in Ms. Sitharaman’s address.

Last year, the government spent ₹2,167 crore on its rooftop solar power programme and for 2024-25, it has budgeted ₹4,555 crore, according to the Budget documents updated on Thursday.

India currently has about 11 GW of installed rooftop solar capacity, of which only 2.7 GW are in residential units and the rest in commercial or industrial spaces. There is no centralised national estimate of how many of India’s estimated 30 crore households have rooftop solar units, though as The Hindu reported last month citing estimates from experts, it is unlikely to be over 10 lakh. The Finance Minister also did not indicate a time line for the installations.

Also read: Key takeaways from interim Budget 2024-25 in charts

The Ministry of New and Renewable Energy (MNRE) estimates the cost of installing a 1-2 kW (kilowatt) system at about ₹43,000 per unit. Units up to 3kW are eligible for a subsidy of about ₹14,000 per unit.

Limited consumption

India’s low uptake of rooftop solar systems is largely due to limited electricity consumption and existing subsidies for coal-fired electricity that make even subsidised solar power expensive, suggested the result of a research spanning 14,000 households across 21 States, a study by the Council on Energy, Environment and Water (CEEW) had reported in November 2023.

Neeraj Kuldeep, Senior Programme Lead, CEEW said in a statement on Thursday that 20-25 GW worth of rooftop solar capacity could be supported through solarisation of 1 crore households. Residential consumers receive subsidised electricity from distribution companies (discom) and were such households to ‘solarise,’ it would save discoms about ₹2 lakh crore over the next 25 years (the solar plant’s life). “All States can leverage this opportunity as rooftop solar potential exists everywhere, unlike utility-scale solar (solar parks), which is primarily restricted to seven RE-rich States, he added.

Because solar power is only available during the day and battery storage systems are expensive, the global experience with rooftop solar is that most households with solar panels also rely on electricity from the grid.

Ms. Sitharaman also announced a ‘viability gap funding’ to support the capital intensive offshore wind sector, of up to 1 gigawatt capacity. These are wind farms located in the sea.

Though no details or budgetary allocations were announced, it is expected to encourage private sector investments in the sector, with the government committing to pitch in with a portion of the required installation costs.

Sea-based windfarms are expensive but given that strong winds are more consistent in the sea, they are projected as being more reliable sources of wind power. India currently has about 44 GW of wind installation, all on land. Studies show a potential of almost 72 GW of offshore wind from the seas off Gujarat and Tamil Nadu.