34.46 % HIKE IN CAPITAL EXPENDITURE-HUGE MULTIPLIER EFFECT

• Be N By IAS, Delhi
• 06, Feb 2021

For: GS-3: Indian Economy, Fiscal Policy

CONTEXT:

• Working with a “constrained resource envelope” in the aftermath of the Covid-19, the government essentially had to make a choice between two policy options:

1. Handouts or
2. Capital expenditure.

• “Government chose capex,”

HIGH CAPITAL EXPEDNITURE:

• The 34.46 % hike in capital expenditure in 2021-22 over the Budget Estimate of 2020-21, to be utilised mostly on infrastructure sectors including rail and roads, will have a
  • Huge multiplier effect,
  • Boost investment,
  • Generate jobs and
  • Improve incomes.
• Handouts: In handouts, it would reach the hands of people immediately. For instance, in Jan Dhan, the propensity to save was high. So, if you release one rupee, people may save for a rainy day.”
• Capital expenditure: Instead, the government was of the view that if money was spent in infrastructure, the high multiplier effect would help.

ADVANTAGE OF HIFH CAPEX:

• Multiplier Effect: Studies of RBI and NIPFP show the multiplier to be in the 2.5-4.2 range for government capital expenditure.
• Advantage:
  • This will trigger growth, starting a virtuous cycle which will then crowd in private spending and private expenditure.
  • With one rupee of capital we could hopefully generate 2.5 rupees of demand,”
• Safety nets continued: MGNREGA and PDS are still in place. Further, It will be funded adequately if more money is required.
• Rural employment: For rural employment guarantee scheme like MNREGS, the government was open to increasing funds. “It’s a demand based scheme. So by its nature, it’s a demand. If required, we will provide more for it,” he said.

CHALLENGES:

• Delaying fiscal consolidation: With the spending push, the government has delayed the glide path for fiscal consolidation, aiming to cap it at 4.5 % of the GDP by 2025-26.
  • For next fiscal, it has been pegged at 6.8 % of the GDP.
• Migrant workers: The government is also working towards changing the system for reaching out to migrant workers, the worst affected during the pandemic. 11 states had finished work for One Nation, One Ration.
• For Unskilled and semi-skilled workers: Government is trying to reach the target group of unskilled and semi-skilled workers through increased government expenditure in the construction sector.

CAPITAL EXPENDITURE:

• It is used to create assets or to reduce liabilities.
• It consists of:

1. The long-term investments by the government on creating assets such as roads and hospitals, and
2. The money given by the government in the form of loans to states or repayment of its borrowings.

Source: Indian Express

MCQs:

Q. The hike in capital expenditure in 2021-22 over the Budget Estimate of 2020-21, to be utilised mostly on infrastructure sectors including rail and roads. It will have a

1. Multiplier effect
2. Reduce investment
3. Generate jobs
4. Improve incomes

Select the correct answer from the codes given below.

• a) 1 and 2 only
• b) 3 and 4 only
• c) 1, 3 and 4
• d) 1, 2, 3 and 4

ANS:C