CAPEX
IN INDIA – ECONOMY
News: Total capex till 2030-31 could be
about ₹1.25 lakh crore: MSI
What's
in the news?
●
Fiscal consolidation commitments will make
the growth in public capital expenditure witnessed in the past few years unsustainable
going forward.
Key
takeaways:
●
The private sector will have to play a
more prominent role to offset the same. Corporate sector balance sheets are
deleveraged and banks are also well-capitalised to aid such an eventuality.
Capital
Expenditure:
●
Capex (Capital Expenditure) refers to the
money spent by the government that leads to creation of assets that are long-term in nature and yield benefits for
years in the future.
●
Expenditure on acquiring land, development
of machinery, building, health facilities, schools etc. are examples of Capex.
Capital Expenditure includes
○
Acquiring fixed and intangible assets.
○
Upgrading and repairing an existing asset.
○
Repayment of loans.
Significance
of Capital Expenditure:
1.
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, 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.
2.
Labour productivity:
●
It also increases labour participation,
takes stock of the economy and raises its capacity to produce more in future.
3.
Macroeconomic stabilizer:
●
Capital expenditure is an effective tool
for countercyclical fiscal policy and acts as a macroeconomic stabilizer.
4.
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.
5.
Liability reduction:
●
Along with the creation of assets,
repayment of loans is also capital expenditure as it reduces liability.
6.
Economic growth:
●
Capex by the government creates a conducive environment which leads to
crowding in of private investment.
●
Capex by the government can put money in
the hands of people which leads to demand creation and starts a virtuous cycle
of growth in the economy.
7.
Crowding-in of investment:
●
It is a phenomenon that occurs when higher
government spending leads to an increase in economic growth and therefore
encourages firms to invest due to the
presence of more profitable investment opportunities.
●
The crowding-in effect is observed when
there is an increase in private investment due to increased public investment,
for example, through the construction or improvement of physical
infrastructures such as roads, highways, water and sanitation, ports, airports,
railways, etc.
8.
Recover from Slowdown:
●
The increasing capital expenditure is
significant against the backdrop of the economic slowdown caused due to the Covid-19 pandemic, coupled with a
decline in employment ratio.
Concerns
of Capital Expenditure:
●
Capex for covering the losses incurred by public enterprises
does not result in benefits for the economy.
●
Capex that ignores critical areas like health, education etc. has limited
positive effects.
●
Spending money in capex while sustaining a
high fiscal deficit has risks increasing
inflation, current account deficit and risks of financial stability which
could negatively affect investor confidence.
●
For Capex to be effective, it has to be
supplemented with a conducive regulatory
regime. Capex has to be implemented
effectively at all levels (central, state and local) to ensure a positive
outcome.
●
Project
implementation costs and time taken is higher in India,
which further impacts the multiplier effect of increased capital expenditure.
WAY
FORWARD:
1.
Timely Implementation:
●
Emphasis on timely implementation of
projects within the earmarked outlay by strengthening
monitoring, redressal mechanisms and processes for controlling project delays.
2.
Easing Process:
●
Optimising
project management processes of all the key stakeholders,
including implementation agencies, state governments, vendors and others will
ensure efficiency during project implementation.
3.
Ensuring quality control:
●
The quality control in turn, will result
in capital assets providing benefits over a longer term following the
multiplier effect.
4.
Managing Revenue Expenditure:
●
The maintenance,
repair and operation (MRO) expenditure, which is part of revenue
expenditure, will have to be monitored during project implementation.
●
It also needs to cut down on inefficient revenue expenditure and focus on creating a
balanced and stable virtuous cycle, which can have positive knock-on effects
over the long term.
Capex is an important
tool used by the government to stimulate
growth and attract investment. However, money spent on Capex must be well
distributed and supported by other policy measures to achieve the desired
results.