How increased government investment spending will contribute to economic growth

What is capital expenditure?

Public expenditure is of two types: revenue expenditure and capital expenditure. Expenditures incurred by the government for operating expenditures and liabilities are revenue expenditures. Salaries, wages, pensions, grants, interest on loans, grants to state governments, etc. fall within this scope. Capital expenditure is the money spent to create or acquire fixed assets – machinery, equipment, land, buildings, investments in stocks, health facilities, education, purchase of new weapons, etc. While capital expenditure creates assets for the future, income expenditure is recurrent in nature.

How important is the capital expenditure?

Creating capital assets, adding production facilities, and improving operational efficiency help an economy generate revenue and increase production capacity over the long term. Capital spending leads to the creation of productive assets, which in turn contribute to economic development, especially infrastructure. The creation of fixed assets creates value and has a multiplier effect on the economy. It promotes job creation and increases purchasing power and labor productivity. Increased public spending through increased contracting also provides a boost to private investment spending.

What has been the evolution of investment spending?

The budget estimate for capital expenditure for fiscal year 21 was ??4.12 trillion. The same for FY22 is located at ??5.54 trillion, one of the highest allocations in over a decade. The last few years have seen a decrease in the budget allocation for capital expenditure – in FY05 it was 19.3% compared to 18.02% in FY08, 12.11% in FY10 , 12.15% in year 20, 13.55% in year 21 and 15.91% in year 22.

What is the impact in terms of development?

Better infrastructure leads to better connectivity, rapid and efficient movement of people and materials, an improved supply chain facilitating barrier-free economic activity, the availability of goods on time at affordable prices, the expansion of industries and ancillary services and improved rate of return for industry. The multiplier effect of central government capital spending is around 2.45, while that of state governments is around 2 versus 0.99 for revenue spending.

What does the Center offer?

The Union budget 2021-22 recorded a 34.5% increase in budgeted capital expenditure compared to fiscal year 21, i.e. a total expenditure of ??5.54 trillion. The government proposes to invest in the construction of national highways, roads, railways, urban infrastructure, sea and river routes, ports, etc. In addition, Prime Minister Narendra Modi announced on August 15 the ??Gati Shakti 100,000 billion program to help overall infrastructure growth.

Jagadish Shettigar and Pooja Misra are faculty members of BIMTECH.