A case for capex ramp-up in Budget 2023-24

After over eight years in power, the excitement over Modi government’s Budgets has diminished. But the Union Budget still retains its character as the operational aspect of the economic vision of the government.

One expenditure head that is most tracked by the multilateral and international rating agencies as also the economist fraternity is capital expenditure. It is characterised by high multiplier effects, generates employment while increasing the productive capacity of the economy and also boosts growth.

The Modi government’s accent on capital expenditure has been pronounced since 2014. The ratio of capital expenditure to total expenditure has increased from approximately 12 per cent in 2014-15 to 19 per cent in 2022-23 (Budget estimates) dipping into the share of revenue expenditure while maintaining the requisite expenditure for subsidies and schemes for poor, farmers, women, scheduled castes and tribes. Much of this rise in share of capital expenditure was witnessed in the last two fiscal years.

But the million dollar question is: will the government continue this momentum of capital expenditure? The government must adhere to the policy of stepping up capital expenditure by increasing it to ₹10-lakh crore from ₹7.5-lakh crore in 2022-23 Budget — a significant 33 per cent rise.

The five factors

First, the last three years have been a period of severe crises — Covid, supply chain disruption and commodities and currency volatility. To deal with these crises, the government ramped up capital expenditure.

The IMF’s World Economic Outlook has forecast a world growth of 2.7 per cent in 2023. India is seen as a shining star and is expected to register fastest GDP growth rate amongst large economies. To sustain this growth, the government must continue to step up the capital expenditure.

Second, the multiplier effect of infrastructure investments part of capital expenditure is higher when undertaken at the State-level. But a recent study has shown that most of the 10 biggest States by GSDP have underspent in FY23 so far year-on-year either in absolute terms or as a percentage of full year capex targets sent in their respective budgets. State governments must be nudged to fulfil their target spend on capex while increasing the allocation to Special Assistance to States for Capital Investment to ₹1.5-lakh crore with increased amount allocated to the initial three parts of the scheme.

Third, capital expenditure can aid in cost competitiveness for the exports while reducing the manufacturing costs for the firms.

Apart from the Districts as Export Hubs to give exports a massive push, a Central scheme — PM Drive — Pradhan Mantri District Roads Improvement for Economic growth with a corpus up to ₹50,000 crore can be considered.

Fourth, as per CII Business Confidence Index survey, high borrowing costs and the prevailing uncertainty have hampered the private sector’s capex plans.

The survey further states that most of the heavy lifting to support growth is being done by public capex, with private capex playing a supportive role.

And the fifth, the other benefit of increased capital expenditure is that it is non-inflationary. In 2022, many countries including advanced economies witnessed multi-decadal high inflation while in India, CPI inflation was above the upper band of 6 per cent for 10 months beginning January 2022 before falling below 6 per cent in the last two months.

However, core inflation remains sticky and continues to be above 6 per cent.

The latest RBI monthly bulletin mentions that the monetary policy’s objective is to hold inflation within the mandated tolerance band and guide it towards the medium-term target of 4 per cent by 2024.

The dominant share of capital expenditure in the total expenditure of the forthcoming Budget will aid the RBI in achieving the inflation target.

The writer is Joint Convener, BJP Telangana

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