Centre’s capex infusion strategy needs rethink

Source: The post is based on the article “Centre’s capex infusion strategy needs rethink” published in Livemint on 10th November 2022. 

What is the News?

The Government of India is likely to raise its capital expenditure plan further.It could raise its expenditure from 7.5 trillion rupees in FY23 to 10 trillion rupees in FY24. 

What has been the trend of Capital expenditure by the Central Government?

The Central government has announced a record capital expenditure to offer much-needed support to the economy which struggled to find its feet following the disruptions caused by the Covid-19 pandemic.

This support came in the form of 2.5% of gross domestic product (GDP) in 2021-22 and 2.9% for the current financial year. 

However, the growth story will be incomplete without state governments and the private sector taking action and also without a sustained revival in consumption.

What are the issues faced by the Indian economy in reviving its growth?

Lack of Private Investment: The lack of private investment goes back a decade. In this period, many steps were taken to attract investment. For instance: 

– During the pandemic-hit period, interest rates were at record lows and the system was flush with liquidity. However, while companies made record profits in that period, they chose to repair their balance sheets instead of investing further. 

– Corporate taxes were cut. But it came at a time when consumption was faltering and without a sustained revival in consumption, they could not be expected to invest.

– Currently, with high inflation and low consumption, a broad-based revival in private investment is unlikely soon.

States’ low capital expenditure: The capital expenditure of states is also behind target despite nudges from the Centre. The Centre has spent 4.6% of its Capex plan in the six months till September, but no major state comes close, despite having fiscal space to spend more than their budgeted amount.

No Diversified CapEx spending by Centre: The sizable capital expenditure by Centre was limited to only a few ministries led by roads, defense, and railways. It needs to identify newer areas such as clean energies and green infrastructure including grid upgradation among others to make sure public spending plays a vigorous role in the economy.