Capital expenditure: Necessity & Challenges

ECONOMY/ GOVERNANCE

Topic:

• GS-3: Indian Economy and issues relating to planning, mobilization, of resources

Capital expenditure: Necessity & Challenges

Context: The recent budgetary allocation towards capital expenditure at Rs 5,54,236 crore in FY2021-22(BE) is a rise of 34.5% over FY2020-21.

Necessity

• To recover from Slowdown: This move is significant against the backdrop of the economic slowdown caused due to the Covid-19 pandemic, coupled with a decline in employment ratio.
• Value Creation: The creation of capital assets generates future cash flows for the economy and adds to value creation.
• Multiplier Effect: Capital expenditure is expected to achieve this through a multiplier effect (a change in rupee value of output with respect to a change in rupee value of expenditure). Multiplier effect works through expansion of ancillary industries and services.
• Employment generation: Increased Capital expenditure through multiplier effect leads to job creation and also facilitates labour productivity. 
• Macroeconomic Stabilizer: Thus, capital expenditure is an effective tool for countercyclical fiscal policy and acts as a macroeconomic stabilizer.

Concerns/Challenges

• Time Lag to have effect: This multiplier effect of increased capital expenditure will not take into account the time-lag to kick in, capacity availability in the industry, and undisposed inventory and work in progress before the pandemic-induced lockdowns.
• Inadequate Spendings by people: The multiplier effect loses value if people hold idle cash out of fear of unforeseen expenses and survival paramountcy during possible future lockdowns.
• Inflation: Inflation-induced price rise, particularly in food and health, could also affect the multiplier impact as households would tend to give them priority over other consumption items.
• Bureaucratic Procedural Hurdles: Project implementation costs and time taken is higher in India, which further impacts the multiplier effect of increased capital expenditure
• Quality Issues: Poor quality necessitates recurring maintenance costs attached to a project after its completion.

Way Ahead

• Timely Implementation: Emphasis on timely implementation of projects within the earmarked outlay by strengthening monitoring, redressal mechanisms and processes for controlling project delays.
• Easing Process: Optimising project management processes of all the key stakeholders, including implementation agencies, state governments, vendors and others will ensure efficiency during project implementation.
• Ensuring quality control, which, in turn, will result in capital assets providing benefits over a longer term following the multiplier effect. 
• Managing Revenue Expenditure: The maintenance, repair and operation (MRO) expenditure, which is part of revenue expenditure, will have to be monitored during project implementation. One also needs to cut down on inefficient revenue expenditure and focus on creating a balanced and stable virtuous cycle, which can have positive knock-on effects over the long term.