While gross domestic product (GDP) growth has been slow, the capital expenditure (capex) by the Centre and states has crossed the pre-Covid-19 pandemic levels, said a CRISIL report. Public capital expenditure refers to the money spent on developing fixed assets such as infrastructure, machinery, health facilities, equipment etc.
Such expenditure has a strong multiplier effect unlike revenue expenditure. A 2014 report by the National Institute of Public Finance and Policy estimated that a rupee spent on capital expenditure would increase GDP by Rs 2.45. In contrast, a Re 1 increase in public revenue expenditure would increase GDP by Rs 0.99.
In financial year 2021 (FY21), the capital expenditure by the Centre increased by 31 per cent year-on-year. Similarly, state capex saw an increase in capital expenditure as well, albeit on a lower base of FY20. Nevertheless, state capex is 40 per cent higher than the central expenditure, making it a major part of public capex.
While public revenue expenditure has decreased as various relief measures are rolled back and revenues remain lower, capex has been increasing in the current year. Between April and September, the Centre spent almost 40 per cent of the budgeted targets while states have covered around 29 per cent of the targets. States usually spend a small percentage of their money on capital expenditure in the beginning half. Revenue expenditure is given higher priority and the funds remaining after revenue expenditures are used for capex.
Previously, the government had introduced schemes to incentivise states to meet their capex targets. Under the scheme, a state that meets its targets would be allowed to increase its borrowing limits. Under another scheme, the state promised incentives if states monetised their assets or divest their stake in state-owned public sector entities.
Chattisgarh, Kerala, Madhya Pradesh, Telangana, Punjab and Rajasthan were among the states that met the 45 per cent expenditure targets in the first half. As a consequence, these states were allowed to increase their borrowings by 0.5 per cent of the state GDP. Other states such as Maharashtra, Orissa and Jharkhand have spent less than 20 per cent of their budgeted capex.
The central capex is 26 per cent higher for the April to October period of FY22 at Rs 2.5 lakh crore, as compared to the pre-pandemic period in FY20. However, it was up 28 per cent when compared to FY21 on a lower base. The road transportation, highways, housing, railways and telecommunication sector saw higher capex as compared to both FY20 and FY21. Similarly, the spending on rural development saw an increase as well. Though the segment is categorised as revenue expenditure, the actual expenditures are directed to infrastructure development in rural areas.
According to CRISIL, the Centre’s capex target will be met if the second half sees a 19 per cent year on year rise in capex. In contrast, the states would require a much higher jump of 45 per cent capex growth in the second half. However, it is expected that states would meet around 80 to 85 per cent of the targeted capex.
As we move forward, public expenditure has the potential to reignite growth and hasten economic recovery. As highlighted earlier, public capital expenditure has multiplier effects, allowing every rupee invested in capital expenditure allows GDP to multiply further.
Central capex has a multiplier of Rs 3.25, whereas state capex has a multiplier of Rs 2. As a result, with economic growth, the private sector could begin making more investments, resulting in economic growth. The government’s production linked incentive (PLI) schemes focusing on a few high-potential sectors have attracted several larger players as well.
Companies across several sectors have been deleveraging over the past few years. According to a Nirmal Bang report, the debt-to-equity ratio fell to 0.37 in FY21 from 0.55 in FY20. As companies continue deleveraging, their balance sheet become cleaner, allowing them to take up new capex projects.
The commodity boom has already led to increasing capex from metal and ancillary sectors. In addition, electrical equipment, chemicals, and other sectors which are directly or indirectly affected by the PLI scheme have seen increasing capex as well. In October, loans to large corporates rose by 0.5 per cent, as compared to a decline in the previous year indicating potentially increasing demand.
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