Nuts and bolts of govt capex spend

What is government capital expenditure?

Government capital expenditure refers to the outlay of government funds in the form of investments or development spending towards creation of assets for the long term. An example of capital expenditure could be the money spent on, say, Railways or building national highways and roads. For the current fiscal, the centre had budgeted capital expenditure of ₹5.54 lakh crore. This was 26 per cent higher than the revised estimate of FY21.

Why is government capital expenditure all that important?

A higher capex by government will help generate demand in the economy, attract private investments over longer term and sustain economic growth. By creating long-term assets, the economy is benefitted as it can help generate revenues for many years.

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Through capital expenditure, fixed assets are acquired; existing assets are upgraded or even loans are repaid. The government capital expenditure enhances labour participation in the economy. Also the impact multiplier effect of ₹1 spent on capital expenditure is as high as 2.45 as against any revenue expenditure where the impact multiplier effect is 0.99.

Infact, the cumulative multiplier of capital expenditure is as high as 4.80, showed a NIPFP research released a few years back. Cumulative multiplier measures the cumulative change in economic activity per unit of incremental governmental spending, for the entire forecast period.

In India, is it only the Central government that does all the capex? What is the role of States?

No, in fact States have an equally important role in capital expenditure. They carry a greater responsibility on capital formation than the central government.

The 27 States in aggregate have budgeted capital expenditure of ₹6.36 lakh crore for current fiscal, higher than the ₹5.54 lakh crore of the Centre. The top ten States in terms of size of capex aggregated ₹4.45 lakh crore for the current fiscal and accounted for 77 per cent of the total.

There is concentration in terms of capex and these States are Uttar Pradesh, Maharashtra, Tamil Nadu, Karnataka, Madhya Pradesh, Bihar, Gujarat, Andhra Pradesh, Telangana and Rajasthan. So, if these States don’t play a proactive role in capital expenditure, the overall performance of the economy is affected. For public investment to flourish, States’ capital expenditure too has to grow.

So how are the Centre and the States faring on capital expenditure this fiscal?

Both the Centre and the States have to do heavy lifting in the January-March 2022 quarter if they are going to come closer to the budgeted levels. Data made available by the Controller General of Accounts showed that Centre’s capex outlay till November 2021 was ₹2.74 lakh crore.

In absolute terms, this was higher than the capex level of April-November 2020, but as a percentage of budgeted target was lower at 49.4 per cent as against 58.5 per cent as of end November 2020.

On the part of the States, their capital investments are still sluggish this fiscal with most of them on a wait and watch mode.

A recent CARE Ratings report showed that States are taking a cautious approach and their capex are being calibrated to the flow of their revenues. Given the uncertainty on the fiscal balances, they may give a push to capex only in the last quarter of the fiscal when there is clear information on the revenue/borrowing flows based on the fiscal deficit.

In all, States had in the first half of this fiscal had spent just about 30 per cent of their budgeted capex levels. One must also recognise that capital expenditure is discretionary and can always be held back in case the fiscal deficit numbers are too close for comfort to the budgeted levels.

What then is revenue expenditure and how is it different from capital expenditure?

Revenue expenditure is one that does not create assets for the future or reduces any liability of the government. Salaries of government employees, interest payment on past debt, subsidies, pension etc are expenses that are categorised as revenue expenditure.

These expenses are recurring in nature. For 2021-22, the Centre had budgeted revenue expenditure of ₹29.3 lakh crore.

What is holding back the Centre and States from going the whole hog on capital expenditure?

A possible reason that could be affecting the capex spend is the higher-than-expected expenditure in other areas such as pandemic-related ones. For instance, the additional spend of about ₹1 lakh crore for PMGKAY scheme (extending benefits till March 2022). States too are focused on spending on healthcare and welfare schemes than on infrastructure projects.

What is the Centre doing to prod the States to up their capex play?

The Centre has been nudging the States to spend more and even thrown in incentives like allowing them to undertake additional open market borrowing.

Finance Minister Nirmala Sitharaman had also in November last year allowed advance instalment of one month’s devolution transfer (gave ₹95,082 crore instead of ₹47,541 crore) so that more money is in the hands of States to give a push to their capex plan.

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