India Must Increase CAPEX

 India Must Increase CAPEX

 
In the period preceding the presentation of the budget in India there was considerable discussion regarding management of fiscal deficit. A large number of economists and businessmen had supported the idea of over shooting the fiscal deficit target. India opted for the safer option of sticking to the fiscal deficit target with Rajan and Jetley showing convergence of viewpoint. In this blog we shall analyse management of the fiscal deficit and the need to increase CAPEX.

Understanding Fiscal Deficit, Revenue Deficit, CAPEX

Total government revenue – Total government expenditure = Fiscal deficit. Fiscal deficit does not include the government borrowings. By borrowings government is able to meet the target expenditure.
Revenue deficit is the shortfall in revenue receipts over revenue expenditure. This is also a part of fiscal deficit. Revenue expenditure neither creates an asset, nor reduces any liability. Expenditure which creates assets and reduces liabilities is CAPEX.
Examples of Revenue Expenditure: All government salaries & pensions, interest on past debt, subsidies, grants, running of services, education and health, etc.
Examples of CAPEX: Buying of land, creation of infrastructure, investments in shares, loans to states, foreign countries and repayment of loans are CAPEX.
Revenue expenditure does not create wealth, whereas CAPEX has potential to generate wealth. CAPEX is vital for growth.

Understanding Benefits of CAPEX

Benefits of CAPEX. When Railway expansion is undertaken the following happen as a direct consequence:

  • More jobs are created.
  • Assets created continue to generate revenue for years for the government.

Futility of Some Revenue Expenses

  • Railways have planned to give a subsidy of Rs 30,000 crores in passenger fare in this year. The amount has no productive value. It creates no jobs, nor increases government earnings. It is done as a socialistic practice and with the hope of winning elections.
  • Rs 34,000 crores have been allotted for MNERGA this year. Assessed leakage from this scheme is known to be of 31 to 44 %. Numerous projects undertaken have been abandoned. This leakage and abandoned projects have done no good to the country, but only created black money for the politician-bureaucrat nexus.
  • Immense losses of various PSUs:
    • In 2012 reported losses of PSUs were Rs 2, 45,000 crores.
    • Air India- Rs 30,000 crores till date.

 

CAPEX Can Reduce Fiscal Deficit

During Indian economy’s golden years, the economy was powered by high exports and soaring private investment. However, the 2008 crisis dealt a body blow to both these components of growth. Private investment touched a peak of 18.8% of GDP in 2007-08, but has been around 12% since.  Public CAPEX in India in 2015 was just 10.7% of the total expenditure. To promote growth public CAPEX needs to increase.
A modestly higher fiscal deficit could have set India on a high growth trajectory. It would have helped reduce the fiscal deficit as a share of GDP in the future, by reducing India’s debt-to-GDP ratio. This is because interest payments on accumulated debt (3.3% of GDP in 2014-15) are the dominant component of fiscal deficit. Any reduction in the interest payment-to-GDP ratio would have meant a lower fiscal deficit.

CAPEX on Infrastructure Attracts Private Investment

When a public road connects a village to a town it attracts private investment like small industries, schools, hospitals, etc. Thus such CAPEX promotes good growth.

Conclusion

India needs to increase CAPEX and drastically reduce revenue expenditure. The government is working on these lines. The problem is that Modi tries to benchmark his performance against that of Sonia Gandhi and considers the performance as great. I bench mark his performance against the aspirations of India’s youth and expectations aroused. He is falling short there. India wants and needs a higher growth rate. For this he has to increase CAPEX.
 

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