Nurturing capex- With foreign investments declining, it is necessary to maintain growth in government capital expenditure

Source: The post is based on the article “Nurturing capex- With foreign investments declining, it is necessary to maintain growth in government capital expenditure” published in “Business Standard” on 23rd August 2023.

Syllabus: GS3- Indian economy, mobilisation of resources

News: In this article, the author discusses the Indian government’s new projects and their potential impact on the fiscal deficit. The author also emphasizes the importance of maintaining capital expenditure to support economic growth, despite challenges such as slowing tax revenue and declining foreign direct investment.

How are the Indian government’s new projects impacting the fiscal deficit?

Impact on Fiscal Deficit

1. New Projects Cost: The Union government unveiled projects costing ₹1.2 trillion, such as electric buses, railway enhancements, expanding the Digital India footprint, and support schemes for artisans (Vishwakarma scheme),etc.
2. Current Year’s Expenditure: Not all the project expenses will affect this year’s fiscal balance. Some costs are shared by the states, and only a fraction of the funds will be used before March 2024.
3. Pre-election Spending: Additional schemes, such as extending free food grain supplies or increasing income support for farmers, could potentially widen the fiscal deficit beyond the projected 5.9 percent of gross domestic product (GDP) for 2023-24.
4. Revenue Shortfalls: In the first quarter of 2023-24, the Centre’s gross tax revenue growth was only 3%, compared to the annual 10% target. The net tax revenue declined by 14%.
5. Positive Impact of Capital Expenditure: Government’s capital expenditure rose by 59% in the first quarter, attracting more private sector investments, with approved plans rising to ₹3.53 trillion.

What are the challenges in maintaining capital expenditure to support economic growth?

Fiscal Deficit Concerns: With new projects worth ₹1.2 trillion, there’s potential strain on the fiscal deficit.

Tax Revenue Shortfalls: The Centre’s gross tax revenue grew only 3% in the first quarter, missing the 10% annual target. Net tax revenue even declined by 14%.

Lower Disinvestment Receipts: The expected revenue from disinvestments is lower than initially budgeted, offsetting the potential gains from other sectors like the RBI.

Declining Foreign Investment: Foreign investments fell 16% to $71 billion in 2022-23 in comparison to 2012-13 and continued to decline by 22% in the first quarter of 2023-24.

What should be done?

Prioritize Capital Expenditure: Despite fiscal concerns, the government should aim for the projected ₹10 trillion capital spending for 2023-24.

Revenue Expenditure Control: Focus on limiting revenue expenditure, which was projected to grow only 1.4% in 2023-24 over the ₹34.52 trillion in 2022-23.

Boost Domestic Investment: Encourage private sector growth, given the current commitment of ₹1.72 trillion in investments.

Address FDI Decline: Implement strategies to attract foreign investments, given the 16% drop in 2022-23.