A 34.5% increase in the government’s planned capital expenditure for FY22 and the recent ？100 trillion Gati Shakti scheme are expected to give a much-needed boost to economic recovery. Mint explains how greater capital expenditure (capex) can help the economy.
What is capital expenditure?
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Government expenditure is of two types—revenue expenditure and capital expenditure. Expenditure incurred by the government for operational expenses and liabilities is revenue expenditure. Salaries, wages, pensions, subsidies, interest on loans, grants made to state governments, etc., fall under this. Capital expenditure is money spent to create or acquire fixed assets—machinery, equipment, land, building, investment in shares, health facilities, education, purchase of new weaponry, etc. While capital expenditure creates assets for the future, revenue expenditure is recurring in nature.
What’s the significance of？ capital ？expenditure?
Creating fixed assets, adding production facilities and boosting operational efficiency helps an economy generate revenue and raises its capacity to produce in the long term. Capital expenditure leads to productive asset creation, which in turn aids economic development, especially infrastructure. Capital asset creation leads to value creation and has a multiplier effect on the economy. It promotes job creation and raises purchasing power, and labour productivity. Increased government spending by way of awarding increased contracts also gives an impetus to private capital expenditure.
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What has been the trend in capital expenditure?
The？budget？estimate？for？capital？expenditure in FY21 was at ？4.12 trillion. The same for FY22 stands at ？5.54 trillion, one of the highest allocations in over a decade. The past few years have seen a decline in the budget allocation for capital expenditure—in FY05, it was 19.3% against 18.02% in FY08, 12.11% in FY10, 12.15% in FY20, 13.55% in FY21, and 15.91% in FY22.
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What is the impact in terms ？of？ development?
Better？infrastructure？leads to？better connectivity, speedy and efficient movement of people and material, improved supply chain facilitating hurdle-free economic activity, availability of goods on time at affordable prices, expansion of ancillary industries and services, and the enhancement of the rate of return for the industry. The multiplier effect of the central government’s capital expenditure is approximately 2.45, while that of state governments is around 2 as against 0.99 for revenue expenditure.
What does the Centre propose to do?
The Union Budget 2021-22 saw a 34.5% increase in the budgeted capital expenditure as against FY21, i.e. a total spend of ？5.54 trillion. The government proposes to invest this in building of national highways, roads, railways, urban infrastructure, shipping and waterways, ports, etc. Additionally, Prime Minister Narendra Modi on 15 August announced the ？100 trillion Gati Shakti scheme to help in holistic infrastructure growth.
Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.
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