Elucidate The Multiplier Effect of Capital Expenditure. Also, Analyse the Issues Faced in Taking Up Capital Expenditure Commitments. (250 Words / 15 M) (GS-3 Economy)

Approach :

1. Intro – define capital expenditure.
2. Explain the concept of multiplier effect of capital expenditure.
3. Mention the Union budget proposals.
4. Chart out the issues & challenges.

Capital Expenditure is the long-term expenditure on creation & acquisition of capital assets. Capital expenditure leads to income augmentation, creation of employment opportunities, expands ancillary industries and services, enhances the productive capacity of the economy by stimulating demand.

Public capital expenditure also initiates a virtuous cycle by crowding in private investment. Moreover, it enhances confidence in the economy and attracts foreign investment. All these factors lead to large increase in income. This disproportionate rise in income due to capital formation through capital expenditure is called the multiplier effect. According to study, in India, Capital Expenditure has a multiplier effect of 2.45 in the short term and 4.8 in the long term. It  means that INR 1 lakh crore spent on Capital expenditure will increase GDP by INR 2.45 lakh crore in short term and 4.8 lakh crore in long term.

2022-23 Union budget proposal : It has proposed a steep increase of 35.4% in the centre’s capital expenditure outlay from INR 5.54 lakh crore in 2021-22 to INR 7.50 lakh crore in 2022-23. The outlay proposed for 2022-23 is 2.2 times the outlay in 2019-20.

Additionally, the States will also get grants for the creation of capital assets through various Centrally Sponsored Schemes. Cumulatively, the Central Government’s effective capital expenditure in 2022-23 will jump to INR 10.68 lakh crore. A massive capex support of INR 1 lakh crore to States through the scheme of Special Assistance to States for Capital Investment would be undertaken in the third phase of the scheme.

Challenges surrounding the capital expenditure :

• High Revenue Expenditure Commitments : In 2021, revenue expenditure formed 84% of Government spending. The growing demand for revenue expenditure in budgets is largely responsible for not utilising the higher multiplier effects of capital expenditure.
• Missing Target of Disinvestment : The government missed the last year’s disinvestment target of INR 1.75 lakh crores that resulted in reduced flow of capital receipts to the exchequer. It reduced the money available for incurring capital expenditure.
• Global Uncertainties : Geopolitical uncertainties increase the cost of production and thereby, the need of more capital expenditure compared to previous levels. In addition, rise in the price of essential commodities especially oil, will increase import bill.
• Pandemic induced expenditures : The government is running many schemes to support the poor and marginalized from the after-effects of Pandemic. This has put a significant stress on its capital spending.
• Macroeconomic Stress : The inflation levels in the country are quite high, which is expected to increase. Further the fiscal deficit would be around 9% in 2021-22, indicating a higher interest pay-out in future, reducing the disposable amount for future capital expenditure.

It is expected that with a massive allocation of INR 1 lakh crore, and an improved version of the SSASCE 2022-23 will be a game changer. It will not only spur capital investment and economic growth through the multiplier effect, but will also accelerate the movement of States on the reform path. However, the government should also focus on improving its revenue sources so as to fund its developmental commitments.