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Why does India need Capex?

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India since 1991 needed an infrastructure boom which happened somewhat in the first decade of the century (2000-10). Capital expenditure is the funds used by the government to acquire physical assets like roads, dams, equipment, technology etc. It is the expenditure which creates short term pain for long term benefits. On the contrary, India heavily allocates its funds on revenue expenditure. John F. Kennedy once said, “American roads are not good  because America is rich, but America is rich because American roads are good. Every rupee spent on capital expenditure increases the income/output of the economy by 3.25 rupees through the multiplier phenomenon. On the contrary, it is only 0.85 rupee in the case of revenue expenditure. That is why it is the need of the hour for India to spend adequately on capital expenditure.

It becomes important to mention that the composition and texture of government expenditure is of paramount importance for  economic growth. Following noteworthy points must be taken into consideration: 

1. Education and skill development 

2.Matters of economic affairs 

3. Investment made by the government 

4. Physical capital and infrastructure 

5. Healthcare Systems 

6. Rule of Law and its implementation 

7. National defence and expenditure on security purposes 

In the long-run case, expenditure incurred on (1), (2), (3) and (4) have positive and long  term impact on economic growth.

On the contrary, in the short run scenario, expenditures on (5), (6), (7) have positive  and immediate impact on economic growth.. The government also plays a crucial role  in determining the pattern and sequence of economic growth through reforms made on  public expenditures. These reforms determine directly how much of an economy’s resources to divert to its own use and how the remaining resources should be allocated  to accelerate economic growth. 

The government should  increase its investment in areas that are congenial to the private sector. Private sectors  should be promoted, and the government must take care of the infant industry. Private sector is way more productive than their public counterparts. Government should encourage  productive investment expenditure which is incurred on expenditure on buildings,  dams, machinery, and capital goods. These all activities generate positive externalities (network) which further raises private investment and thus provides an impetus for economic growth. More resources should be allocated in areas of physical infrastructure  and it’s development so that it may stimulate economic growth as mentioned in the  vision 2030. According to SDG 2030, poverty must be eradicated. In order to do this,  the government’s role becomes crucial. State government should spend heavily on  infrastructural projects.

    Types of Government Expenditure                    Multiplier
          Revenue Expenditure                      0.85
          Capital Expenditure                      3.25

The principal reason behind adequate expenditure on physical infrastructure in areas such as roadways, buildings, dams, sanitation programs is because it contributes significantly as well  as effectively to economic growth. This is done by increasing the marginal  productivity of inputs in the private as well as public sectors. Public-Private Partnership  mode must be on in any country. They alone can’t bring efficiency. It is further noticed  that high government expenditure on communication networks, transportation, railways  and efficient projects create an attractive environment for the business community to thrive  and flourish through reduced cost of production. The government should raise its  expenditure and put more allocation to human capital formation through skill  development programs. Human capital always avoids diminishing returns on  factors of production.

This could be done through provision of proper and state-of-the-art education and  technical facilities such as schools, colleges and internship facilities and employing  more teachers, ensuring access to quality and economical education to all of its  citizens. This will reduce the average cost incurred on education and consequently, it  will help in the upliftment of weaker sections of the society. Government should keep  an eye on merit goods as these create positive externality and help in nation building.  It will sustain the long run economic growth and increase the productive capacity. Health care sector must be addressed by the government by allocating more funds. Proper health facilities create more productive human capital which in turn creates  more output. Ayushman Bharat is an example of this as this scheme helped millions  of citizens to get medical facilities at a nominal price. 

If doctors and nurses are provided quality training then the health sector will be  automatically developed and average life expectancy of residents will improve. A  productive and healthy person is always beneficial for the economy. As the saying  goes,”I do not hate criminals, I hate sick men”. This drives the conclusion that medical facilities are of paramount importance in any economy. India lags behind in the Human  Development Index because of poor health facilities. Healthy nation is always a wealthy  nation. 

There should be efficient management of public debt. Public debt to some extent  increases the demand and output of the economy. But if this limit is breached, then it  affects the economy in a wrong way. India spends 22% of its budget on interest  payment incurred on debt. India borrows 30% of its budget. This must be minimised to 20% so that it may decrease the interest payment. Deficit financing through borrowing impacts the private investment severely. It raises the interest rate and  consequently crowds out private spending. There should be perfect assimilation of two types of budgeting, namely, performance  based budgeting and zero based budgeting. Government should not allocate more funds  in those sectors which are not giving returns as it was expected.

Funds must be raised on productive sectors which have forward as well as backward linkage. Government  should borrow loans at a minimum rate of interest and payment must be in Indian Rupee. India won’t default on the debt which is in it’s home currency. “Export Promotion  Capital Goods” scheme must be implemented at a faster pace. This will make the Indian  industry more competitive in foreign trade. Focus must be made on manufacturing and  construction sectors as its employment elasticity is high. These sectors not only create  capital and durable goods but also creates employment which in turn increases output.  Tourism sector in India is always undermined. India has not known it’s huge potential.  This sector increases income of nearby localities (Taj Mahal and Statue of Unity).

This signifies that the government must have effective and efficient policies for long and sustained development in order to avoid or minimise crowding out the private investors  who play an instrumental role in the growth and development of the state. In India, if the government spends 100 Rupees on capital expenditure then at least 30 rupees come  back to the government in form of income taxes and GST on goods. Therefore, the government  should not be reluctant to spend on infrastructure. 

The allocated efficiency in the public sector can lead to enhanced efficiency in the competitive markets for goods as well as services. Government should make the factor market more competitive and must avoid the creation of a monopoly in the economy. Monopoly can’t mobilise the funds in an efficient and judicial way. The government  must keep an eye on defence and military. This is certainly because when these sectors’  allocation is increased significantly, there is a remarkable change in economic growth.  These sectors conspicuously help to improve safety within the economic situation. Subsequently, it increases financial activities in the areas of travel and tourism as well as Foreign Direct Investment. 

It is equally important for policy reformers to pay heed not just to the size of  government expenditure, but also to its texture and composition. According to the Rahn curve, it is advisable that government expenditure should not exceed 25 percent of GDP  of any state. If this limit is breached then is detrimental for any economy and it consequently retards the growth.  

At last, efficiency in government expenditure can be enhanced by transparency and  accountability only. A state must focus on those sectors which have the highest  employment elasticity. It must stress on capital expenditure as it promotes long term  growth. India should try to become a capital intensive country. Agriculture sector needs a radical change. It only adds to 18% of GVA and employs 50% of the workforce. It is quite absurd and must be paid attention. New Farm Law has the potential to remove this disparity.

 The  share of government expenditure should be as follows:

  •  70% of total expenditure should go to revenue expenditure
  •  30% of total expenditure should go to capital expenditure. 

But in 2019, the share was 85% and 15% for these two. A special committee should be  set up to review the cost and benefit analysis of the budget. Government must follow it’s recommendation. This will make the budget more efficient and pro-development. The government should reduce its size to an optimal one by adopting a policy on strategic privatization and appreciate the private partners in the economy. This will  reduce the debt on the government and our future generation will not have to pay for us.

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