Govt's Q1 Capex Declines, FY2025 Goals Look Challenging: Icra
The Modi government's capital expenditure down in the first quarter of FY2025, making it challenging to meet the ambitious targets set for the full fiscal year
The rating agency Icra in a report has said that the Modi government's capex shrunk by 35 per cent year-on-year (YoY) in Q1 FY2025, and the capital outlay and net lending of 24 states dipped by 12 per cent YoY in 2MFY2025. Accordingly, a sharp expansion is required in the remainder of the fiscal (Centre: +39 per cent and 24 states: +38 per cent) to meet the respective targets for FY2025.
The rating agency believes that achieving the Central government's and states’ capex target in FY2025 would be an ambitious task, amid the election-related disruptions in the early part of the fiscal. Besides, there is uncertainty around the absorption of the entire budgeted amount for capex loans to states (Rs 1.5 trillion: 44 per cent growth over FY2024 RE) in the remaining eight months of the fiscal, which would depend on guidelines for a tied portion of the scheme.
In line with Icra's expectations, the central government retained the interim target for gross capital expenditure at Rs 11.1 trillion in FY2025 revised budget estimates (RBE), entailing a growth of 17.1 per cent over Rs. 9.5 trillion recorded in the FY2024 PA. While some state governments may present revised budgets for FY2025, the previously presented budgets revealed a robust 33 per cent expansion in the combined capital outlay and NL of 24 states to Rs 9.3 trillion over FY2024 PA.
Poll Uncertainty Hits Infrastructure Plans
As was largely expected, new project declarations plunged from the four-quarter high of Rs 12.6 trillion in Q4 FY2024 to just Rs 1.1 trillion in Q1 FY2025 when the General Elections were underway; this was the lowest cost in the last two decades. The announcements by the government and private sector dipped to Rs 0.4 trillion and Rs 0.7 trillion, respectively, in Q1FY2025, sliding to the lowest levels in nearly 6.5 and 3.5 years, respectively.
As business returns to normal after the election-related lull in activity in Q1 FY2025, new investment proposals are expected to pick up from the ongoing quarter, a trend that is typically seen in election years.
Nevertheless, Icra believes that the private capex cycle is likely to be measured and not exuberant amid the slow recovery in domestic rural demand, sluggish external demand, and the uncertainty stemming from geopolitical risks and elections in some advanced economies.
As per the early data, project completions were exceptionally low at Rs 0.42 trillion in Q1FY2025, the lowest level since Q2FY2008 (Rs 0.39 trillion; barring Covid-affected quarters). This was largely anticipated since execution had gained momentum in Q4FY2024 when completions touched an all-time high of Rs 3.9 trillion before the model code of conduct set in from mid-March 2024.
Additionally, the general elections are also likely to have delayed the commissioning of a few projects that were intended to be completed in Q1FY2025, Icra noted in the report.
