India's corporate sector now has the opportunity to take on a higher role in creating new capacity and making investments, says Manoj Govil, Secretary of Expenditure, Ministry of Finance.
In an interview with Outlook Business, Expenditure Secretary Manoj Govil talks about how the government is trying to make it easier for the private sector to invest in India
India's corporate sector now has the opportunity to take on a higher role in creating new capacity and making investments, says Manoj Govil, Secretary of Expenditure, Ministry of Finance.
"For some time now, the Economic Survey and documents released by the Economic Division have emphasised the need for the private sector to step up in the investment cycle," says Govil, who earlier served as Secretary in the Ministry of Corporate Affairs.
In a bid to boost consumption in the country, Union Minister of Finance and Corporate Affairs Nirmala Sitharaman in the Union Budget 2025-26 announced several measures including a significant tax relief for India's middle class.
Govil, in an interview with Outlook Business, talks about how the government is trying to make it easier for the private sector to invest in the country. He also discusses issues related to state spending and investments in technology.
Edited Excerpts:
The budgeted capital expenditure (capex) is now almost level with the fiscal deficit estimated for 2025-26. Does it mean that we will now only see modest increases in the capex allocation?
During the Covid-19 period, the government had to significantly increase both capital and revenue expenditure to support the economy. As a result, the fiscal deficit surged to 9.2 per cent—a level clearly unsustainable in the long term. However, given the extraordinary circumstances, the focus was on investing in the economy through capital spending while addressing immediate revenue needs. Even state governments saw their fiscal deficits rise during this time.
Recognising the need for fiscal consolidation, the finance minister had announced a roadmap to bring the deficit below 4.5 per cent by FY26. Since then, the numbers have been gradually normalizing. The current figures reflect a return to stability, unlike the crisis-driven spending of the pandemic era.
Despite fiscal consolidation, capital expenditure continues to see strong growth. The effective capital expenditure is set to increase from Rs 13.18 lakh crore (revised estimates for the current fiscal year) to Rs 15.48 lakh crore in the next year’s budget estimate—a 17 per cent rise. In contrast, overall expenditure is projected to grow by about 7 per cent. This is still a handsome amount of investment.
Has the Centre shifted its strategy to crowd in private investment from capex to consumption?
The consumption story is also crucial, and a weakness in demand was felt. This prompted certain tax measures to address the issue. However, the capex story remains alive.
It is only that one should not expect a 25-30 per cent year-on-year increase in capex for a long time. Even mathematically it is not feasible in the long run. Since capex is a component of total expenditure, if the overall spending grows at around 10 per cent, maintaining such high capex growth would eventually consume an unsustainable share of the budget. This would lead to a decline in other key expenditures, such as defense and revenue spending, making the fiscal balance untenable.
What are your thoughts on the Economic Survey’s suggestion on levying a tax on AI-driven job losses? Given that the private sector is not investing on the required scale, can the Centre go ahead with this suggestion or opt a different way?
For some time now, the Economic Survey and documents released by the Economic Division have emphasised the need for the private sector to step up in the investment cycle. More importantly, they have highlighted that while corporate profitability was quite high in the post-Covid years, those profits have not been directed as expected toward new capital formation or employee remuneration. However, in terms of specific steps, particularly taxation measures, no such provisions have been introduced in this year’s budget.
The idea is that the corporate sector now has the opportunity to take on a higher role in creating new capacity and making investments. And as a government, we keep getting the suggestion that the regulatory burden remains to be an issue.
So, on the reform front, the Finance Minister, in her budget speech, announced several steps to address the concerns regarding regulatory overload. The government has received suggestions to ease the regulatory burden, and as a result, four specific measures were introduced—three at the central government level and one at the state government level.
At the central government level, the FSDC (Financial Stability and Development Council) will look into financial regulations, a high-level committee will be formed to address non-financial regulations, and the Jan Vishwas Bill 2.0 will be pursued, building on existing efforts. These steps are aimed at making the regulatory environment more investor-friendly and resolving difficulties faced by investors.
On the state government side, the introduction of the investor-friendliness index will nudge states to assess their regulations and improve them to attract greater investment. The idea is that both the central and state governments working together can create a more investor-friendly environment. While significant progress has already been made, there are still areas where further work is required.
The RBI recently asked the state governments to improve their quality of spending. Is there any way through which the Centre can make the state governments follow the same path it has been following, so that quality of life improves in the country?
The investor-friendliness index is one part of the broader reform initiative. Another key component is the 50-year scheme, which includes reform elements. Additionally, the government has introduced the Urban Challenge Fund. This fund aims to support municipal bodies in developing bankable projects. The Government of India will provide a certain amount of funding, with contributions from banks and other financial institutions, which will collectively support urban infrastructure projects, including sanitation and connectivity.
The goal is to improve the quality of life in urban areas, which requires substantial investment in municipal services and infrastructure. The hope is that state governments and municipalities will leverage this fund to drive progress. While the fund will provide financial resources, the implementation of these projects will largely be the responsibility of the municipal bodies themselves.
The broader vision is that the private sector, municipal bodies, state governments, and the central government must work in a coordinated manner to drive not only investment and growth but also measures that contribute to a higher standard of living for citizens.
Given the various welfare schemes and cash transfers from both central and state governments, do you think it's time for the government to calculate the real income of people, particularly those below the poverty line, factoring in the value of these benefits to address inefficiencies in the system?
Some of the transfers made to people have indeed helped boost consumption. A recent report highlighted that the poverty line can be viewed in two ways: earned income and the impact of government facilities and benefits. These facilities include direct cash transfers, free food grains, or subsidised food grains. According to the NITI Aayog report, such measures have helped lift a large number of people above the poverty line. Therefore, the steps taken by both central and state governments are useful.
However, our primary suggestions to state governments are to maintain fiscal prudence. We ask them not to spend beyond available resources. The core principle is deciding which schemes to implement based on the resources at hand. If a state has the means, it can implement the scheme. The quality of expenditure, however, is something analysts may debate, as opinions may vary across backgrounds.
Moreover, if spending exceeds available resources, states must ensure there are sufficient tax revenues to support it and avoid excessive borrowing. Borrowing limits are set for states, although not all state governments are content with this arrangement. We continue to urge them to practice fiscal prudence while respecting their flexibility to implement specific programs.
The budget has allocated Rs 500 crore towards artificial intelligence (AI) at a time when China is giving a tough fight to the west in the technology race. Do you think this allocation is significant in the sense that it can help India catch up in this race?
The Cabinet approved an AI project in March last year, which was further detailed by the Minister for MeitY in a press conference a few days earlier. The AI mission, which involves the acquisition of 18,000 GPUs, is focused on developing foundational models based on Indian culture and languages. The aim is to create a new AI model that reflects these unique elements. The Minister pointed out that the new models developed have already achieved impressive performance with relatively lower investment. So, money is not an issue in that sense. It is more about algorithmic efficiency.
Compared to other countries, India’s R&D spends as a share of gross domestic product (GDP) is significantly low, especially when the private sector is considered. Don’t you think to become an upper-middle income country by 2030, this should now increase rapidly?
One of the major announcements in this year's budget is the allocation of Rs 20,000 crores to the Department of Science and Technology under the ANRF (Accelerated National Research Fund). This funding will be directed toward supporting startups and projects, enabling them to scale up and reach the production stage. The details of how this will be executed are still being worked out, but it is a significant investment.
The overall budget for science and technology has seen a substantial increase this year. In the past, the department's budget was relatively small, often under Rs 100 crores. However, this year's allocation has risen to Rs 20,096 crores, marking a significant improvement.
Additionally, when looking at the overall budget for scientific departments, the revised estimate for this year was Rs 30,000 crores, which has now surged to Rs 56,000 crores—an impressive 70 per cent increase, the highest in all categories. This funding will be used in collaboration with the private sector, with R&D projects from both government and private sectors being eligible for funding.