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Capex in budget

  • Category
    Economy
  • Published
    8th Feb, 2022

Context

Recently, the government has announced a sharp jump of 35.4 percent in capital expenditure to fund various infrastructure projects in 2022-23.

Background

  • The central government’s budget for 2022-23 showed a sharp jump in capital expenditure to a planned Rs 7.5 lakh crore. That 35% increase in budgeted CAPEX, however, may not all be fresh funding.
  • This push is proposed to target growth of 8.2 percent in 2022-23.
  • The Finance Minister noted that the public capital expenditure has been raised to pump prime the investment cycle and support demand, thereby boosting India's economic recovery from the COVID-19 pandemic.
  • Centre will provide Rs 1 lakh crore of interest-free bonds to states to help prioritize Capex as they face challenges posed by end of goods and services tax compensation.
  • Capex is concentrated in eight ministries and departments, with atomic energy accounting for 1.9% of the total Capex, telecommunications 7.2%, defense 20.3%, transfer to states 14.9%, police 1.4%, housing, and urban affairs 3.6%, railways 18.3% and road transport and highways 25.0%.
  • This indicates the government is attempting demand-side support to the economy through CAPEX.

Analysis

What is Capital Expenditure?

  • Capital expenditure is the amount spent by the government on the development of infrastructure, facilities, equipment, etc.
  • It also includes the expenditure incurred on acquiring fixed assets such as land and investment by the government, which will give profits or dividends in the future.

Capital Expenditure hike significance

  • Also, early implementation of the expansion of capital spending can trigger durable economic growth momentum, with the potential to augment job creation, prop up domestic consumption and hasten capacity expansion by the private sector.
  • The Finance Minister said that the virtuous cycle of investment is expected to revive on the back of capital expenditure and crowd in private investment.
    • The total spending for the financial year 2022-23 has been estimated to be around Rs 39.45 trillion. This will constitute 2.9 percent of the GDP.

What are the examples of Capital Expenditure?

  • Capital expenditure is the part of the government spending that goes into the creation of assets like schools, colleges, hospitals, roads, bridges, dams, railway lines, airports, and seaports.
  • Capital expenditure also covers the acquisition of equipment and machinery by the government, including those for defense purposes.
  • Capital expenditure also includes investment by the government that yields profits or dividends in the future.

Benefits of Capital expenditure

  • Multiplier effect - Capex has the maximum multiplier effect (change in rupee value of output with respect to a change in rupee value of expenditure).
  • This multiplier effect works through the expansion of ancillary industries and services and job creation.
  • According to the National Institute of Public Finance and Policy, every rupee spent as a revenue expenditure has a multiplier effect of Rs 0.98 while Capex delivers a multiplier effect of Rs 2.25 in the year it is incurred and Rs 4.80 during the course of the entire expenditure.
  • Labour productivity - On the supply side, Capex can facilitate labor productivity.
  • Macroeconomic stabilizer - Capital expenditure is an effective tool for countercyclical fiscal policy and acts as a macroeconomic stabilizer
  • Revenue generation - Capital expenditure leads to the creation of assets that are long-term in nature and allow the economy to generate revenue for many years and boosts operational efficiency.
  • Liability reduction - Along with the creation of assets, repayment of loans is also capital expenditure as it reduces liability.
  • Economic growth - Government CAPEX catalyzes private investment, increases production capacity thereby speeding up economic growth which in turn creates a lot more jobs.

Drawbacks of Capex

  • The increase in the fiscal deficit as of present is 6.9 percent.
  • It can cause a deficit in the balance of payment.
  • It can increase inflation in the economy

Suggestive measures

  • Promoting the foreign exchange reserve to bear the market shocks.
  • Increase in revenue receipt by disinvestment in Public undertaking.
  • Robust tax collection and GST Compliances

Verifying, please be patient.

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