Capex expansion for multiplier effect on growth

Udayan Hazarika

(The writer can be reached at udayanhazarika@hotmail.com)

 Budget for FY25

The interim budget of the Union Government for the financial year 2024–25 (FY–25) has some important indications about the shape and size of the final budget for the year. It is evident that the present government submitted the interim budget with full conviction that they would come back for the submission of the final version of this budget. In the last year’s budget, the FM incorporated as many as 185 schemes, of which six were core schemes, 32 were core schemes, and the remaining 147 were major central sector schemes. But in the interim budget, the government made some rearrangements of the schemes. Some schemes have been removed; some have been shifted to the core, while others have been transferred to the central sector. For example, Ayushman Bharat was earlier on the list of the core scheme, but this has been shifted to the core scheme list as PM’s Ayushman Bhararat. Apart from the ongoing schemes, the government will not be able to start the new schemes accommodated in the interim budget. By the time this budget becomes effective in April 2024, the model code of conduct will be in force, as the government must complete the election process by May so that the 18th Lok Sabha is constituted by June 15, 2024. If the BJP comes back to power, then they will immediately hold a session of the House and get the budget passed. Otherwise, for a new government, it will take some time to arrange the House in order.

A look at the estimated receipt and expenditure position of the Budget 2023–24 would make it clear that the government is consciously ignoring the fiscal consolidation measures enunciated in the Budget 2022–23. As per the budget estimates, the total receipt of the government is fixed at Rs 47.66 lakh crore, of which 30.01 lakh crore will come from both tax and non-tax sources as revenue receipt and Rs 0.79 lakh crore as capital receipt, which together make Rs 30.80 lakh crore. While estimated expenditure is fixed at Rs 47.66 crore, leaving a gap of resources at Rs 16.86 lakh crore, the FM proposes to bridge this by resorting to borrowing. Thus, as much as 35.38 percent of the budgetary resources will come from borrowing this year. 69 percent of this borrowing will come from market borrowing, followed by 27.89 percent, which will come from securities and small savings. Thus, the estimated fiscal deficit comes to 5.1 percent. It may be noted that the estimated expenditure will fall short of the requirement in the budget FY-25 as compared to the current year (2023–24). The enhancement is made only by 6.15 percent, while it was 7.08 percent in the current year compared to the last year, i.e., 2022–23. Considering the ruling inflation and the rising food prices, it will be difficult to contain the expenditure at the proposed level, which will go up at least by 9.0 percent as against the current year. This will further drag the economy into a broader fiscal gap.

One notable feature of the budget for 2024–25 is the enhanced outlay for capital expenditure. Capital expenditure (CAPEX) is looked upon as a long-term growth engine, contributing greatly towards investment in infrastructure and the creation of employment in an economy. In her printed budget speech, the FM has added a note describing the government’s success story of increasing capital expenditure in the last two years. The Budget 2024–25 has allocated an enhanced capital outlay of Rs 11.11 lakh crore, as against the current year’s revised outlay of Rs 9.52 lakh crore. Thus, 16.70 percent higher than the current year’s amount is proposed. It may be noted here that in the current year, the budget allocation for Capex was to the tune of Rs 10.00 lakh crore, which has since been revised down to Rs 9.52 lakh crore. Our common experience shows that every year the government allocates more funds for capital expenditure enthusiastically, but at the very end of the year, they are either not spent or revised downward. In fact, the fund from the capital outlay is the most reluctantly and slowly spent fund. The current year itself (2023–24) is the best example of it. Even the revised outlay may not be spent finally, and this will be clear as soon as we receive in the next year the actual amount spent on this front. This is the normal scenario in the case of government spending from capital outlays.

If we have a look at the percentage share of the capital expenditure to the total expenditure, the data reveals that the proportion of the capital expenditure to the total expenditure in actuality revolved around 12 percent and 15 percent from 2015-16 to 2020-21. In the years 2021–22, the government gave incentives to the States for expanding their infrastructure expenditure from the budgetary fixation of Rs 10,000 crore, which was later revised upward to Rs 15,000 crore. Marginal improvement could be noticed as a result of this additional incentive, with an increase in the share of capital expenditure to total expenditure from 14.4 percent in 2020–21 to 15.62 percent in 2021–22 and 17.65 percent in 2022–23. This is undoubtedly encouraging for the government, assuming that the same normal conditions would prevail, although in the current year 2023–24, the government is expecting a multiplier effect of the proposed increase in capital expenditure. In India, the effect of the capital expenditure multiplier is calculated at 2.4, i.e., in simple terms, if one dose of capital expenditure is increased, it keeps the capacity to transform economic activities 2.4 times. Enhancement in economic activities always generates income, which finally adds up to GDP. This is for the short term only. As per the calculation made by the National Institute of Public Finance and Policy (NIPFP) for seven years from 2013, the multiplier effect for the whole seven-year period together comes to 4.5. This is indeed more theoretical than practical. Because government spending on capital is always budget-dependent, the budget is dependent on the receipt side. Natural calamities, monsoon failures, other disasters, war, etc. are always there to play their roles. Moreover, not all government spending on capital is employment-generating, and last but not least, unless the government-invested fund from the capital outlay fails to attract private investment in the capital account, the whole premise of the multiplier effect will fall apart. So smooth sailing is not easy. The abovementioned factors are to be neutralized to achieve the expected growth.

The result of this borrowing would be the expansion of fiscal deficits further from 5.1 percent because every increase in capital expenditure would invite a corresponding increase in revenue expenditure. Considering this, allocation on the revenue account could have been enhanced further. But the government did not do so. The amount allocated for revenue expenditure, i.e., Rs 36.55 lakh crore, is only 03.25 percent more than the current year’s revised allocation of Rs 35.40 lakh crore. This being the year of general elections and the interim budget of the present government, revenue expenditures are bound to increase.