IMPORTANCE OF CAPEX - ECONOMY
News: Renewed
thrust on capex: Outlay hiked 33% to Rs 10 lakh crore
What's in the news?
● The
Union Government has again chosen capital expenditure as a key focus area in
the 2023-24 Union Budget.
● Finance
Minister Nirmala Sitharaman said that the Centre will continue its 50-year interest-free loans to State
Governments for an additional 12 months in order to aid infrastructure
investment with an outlay of Rs 1.3 lakh crore.
● The
Centre’s capital expenditure outlay will be Rs 10 lakh crore for FY24, an increase of 33 percent year-on-year.
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 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.
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.