The one big takeaway from the Union Budget 2022 is the increase in capital expenditure (capex). The capital expenditure outlay has been increased by 35.4 % for 2022.
It is expected to go up to Rs 7.50 lakh crore in FY 2022-23. This includes Rs 1 lakh crore earmarked as special borrowing by states to be spent specifically on capital expenditure.
This has been done to boost growth and crowd-in private investment.
Nirmala Sitharaman’s budget speech delineates that- capital investment holds the key to speedy and sustained economic revival and consolidation through its multiplier effect
[You may also read: Key highlights of the Union Budget 2022]
First things first, what is capital expenditure?
It is the money spent by the Government on the acquisition/ construction of assets (resources that have future benefits). Eg- construction of roads, bridges, schools, purchase of land, development of health or education facilities, etc
It also includes money spent on the reduction of a liability (future obligations). Eg- repayment of a loan. [Loan is a liability or an obligation. Repaying leads to reduction of an obligation]
Budget 2022 has prioritized capital expenditure for modern infrastructure. For instance- the National Highways network will be expanded by 25,000 km in 2022-23.
How is it different from revenue expenditure?
Revenue expenditure neither leads to an increase in assets nor a reduction of liability. Some examples are- salaries of employees, interest payments on loans, subsidies, pension, etc.
Revenue expenditure is usually recurring in nature.
What is the multiplier effect?
Multiplier effect means that when the government spends a rupee, it will lead to a rise of more than a rupee in GDP.
The Finance Minister Nirmala Sitharaman responded in the Parliament that- every Re. 1 spent on CAPEX (capital expenditure) has a multiplier effect of Rs 2.45 worth of multiplier in the immediate year, and Rs 3.14 worth of effect in the following years. [It means when the Government spends one rupee, the GDP increases by Rs.2.45]
[You may also read: What is GDP?- Explained]
[On the other hand, she mentioned that revenue expenditure gives a 45 paise multiplier effect in the immediate year, and an additional 10 paisa multiplier in the next year.]
Why is there a multiplier effect?
Capital expenditure leads to the creation of assets. Assets are resources that represent future benefits. Roads, bridges, etc will enable the economy to generate revenues for many years.
It lays the foundation for long-term growth.
Capital expenditure boosts two constituents of GDP:- consumption demand (by putting more money in the hands of people by employment generation) and private investment (for inputs like cement, steel etc and also by helping with more production of goods and services ). For instance:- It is due to the government’s capital expenditure that the steel and cement industries are looking to expand capacities.
Lastly, why are states worried about higher CAPEX?
This is because the enhanced capital expenditure allocation is coming at the cost of a reduction in other heads
the enhanced capex allocation coming at the cost of a reduction in grants in aid, revenue deficit grants, subsidies for food, fertiliser, fuel and allocation for MGNREGA.
//indianexpress.com/article/explained/explained-states-worried-high-capex-budget-2022-7770088/
Economyria is now on Telegram. For a simplified analysis of topics related to economy/ business/ finance, subscribe to Economyria on Telegram