[Yojana March Summary] Harnessing Multiplier Effect – Explained, pointwise

For 7PM Editorial Archives click HERE
Introduction

The Indian economy is going through tough times due to the setback caused by the COVID-19 pandemic. The geopolitical risks associated with the ongoing Russia-Ukraine conflict pose further uncertainties. In the present scenario, the focus should be on strengthening India’s economy and reducing its external reliance. In the Union Budget 2022-23, the Finance Minister unveiled a transformative approach to invigorate demand and accelerate economic growth. The approach relies on utilizing the multiplier effect by boosting the capital expenditure by both the private and public sector.  The Government also increased the outlay under the Scheme for Special Assistance to States for Capital Expenditure (SSASCE) to enhance the capacity of the State governments to undertake capital expenditure.

What is the multiplier effect of Capital Expenditure?

Capital Expenditure is the long-term expenditure on creation and acquisition of capital assets e.g., the money spent on infrastructure, construction of roads, buildings, machinery, railway lines, airports etc. falls under Capital Expenditure. Capital expenditure leads to income augmentation, creation of employment opportunities, expands ancillary industries and services, enhances the future productive capacity of the economy, and stimulates demand

Public capital expenditure also kicks off a virtuous cycle by crowding in private investment. Moreover, it enhances confidence in the economy and attracts foreign investment. All these factors lead to large increase in the income. This disproportionate rise in income due to capital formation through capital expenditure is called the multiplier effect.

According to a study undertaken by the economists at the National Institute of Public Finance and Policy; in India, Capital Expenditure has a multiplier effect of 2.45 in the short term and 4.8 in the long term. It  means that INR 1 lakh crore spent on Capital expenditure will increase GDP by INR 2.45 lakh crore in short term and 4.8 lakh crore in long term.

The image depicts the working of the Multiplier effect

ForumIAS is now in Hyderabad. Click here to know more
What are the proposals for Capital Expenditure in the Union Budget 2022-23?

In the Union Budget 2022-23, the Finance Minister has proposed a sharp increase of 35.4% in the centre’s capital expenditure outlay from INR 5.54 lakh crore in 2021-22 to INR 7.50 lakh crore in 2022-23. The outlay proposed for 2022-23 is 2.2 times the outlay for capital expenditure in 2019-20.

In addition, the States will also get grants for the creation of capital assets through various Centrally Sponsored Schemes. If this amount is added, the Central Government’s effective capital expenditure in 2022-23 will jump to INR 10.68 lakh crore. A massive capex support of INR 1 lakh crore to States through the scheme of Special Assistance to States for Capital Investment would also be given under the third phase of the scheme.

The image depicts outlays for Capex in Budget

Source: Yojana, PIB

What is the Scheme for Special Assistance to States for Capital Expenditure (SSASCE)?

The Union Government had extended a special Scheme of assistance to the State Governments in respect of capital expenditure during the financial year 2020-21 during the COVID-19 pandemic. The Scheme was called ‘Special Assistance to States for Capital Expenditure’ and an amount of INR 12,000 crore was set aside for this purpose. Funds were provided in the form of a fifty-year interest-free loan. This loan was above the normal borrowing allowed to the States. 

The States could use the funds provided under the Scheme both for new and ongoing capital projects. They were also allowed to use the Scheme funds for settling pending bills in ongoing projects. 

The Scheme design was kept simple and the States were given full flexibility to choose projects. Moreover, the information on proposed projects was obtained in a simple format without insisting on the submission of Detailed Project Reports (DPRs).

The Ministry of Finance also decided to provide an additional 2% borrowing to the states in 2020-21. However, half of the additional borrowing was linked to the States completing reforms in four citizen centric areas. The areas identified for reforms were implementation of the One Nation One-Ration Card System, Ease of Doing Business reforms; Urban Local Body/ Utility reforms; and Power Sector reforms.

Considering Repeated requests of the States, the second version of the scheme was launched in the Financial Year 2021-22 with an outlay of INR 10,000 crore. 

The third version of the scheme was announced in the Budget 2022-23 with a tenfold increase in budget outlay reaching INR 1 lakh crore.

The image depicts the amount transferred to States under the Budget SSASCE

Source: Yojana, PIB

What is the rationale behind its launch?

The allocation under the scheme will be used for PM Gati Shakti-related and other productive Capital investments of the states. The Gati Shakti Mission brings together 16 Ministries including Railways and Roadways. It aims at integrated planning and coordinated implementation of infrastructure connectivity projects.

In addition, the allocation under the scheme is also proposed to be used for supplementary funding for priority segments of the Pradhan Mantri Gram Sadak Yojana (PMGSY), including support for the State’s share. 

Moreover, the Scheme will also be leveraged to motivate States to undertake reforms in the areas like digitisation of the economy, including digital payments and completion of the Optic Fiber Cable network. It will also help in fulfilling reforms related to town planning schemes, transit-oriented development, building by laws, and transferable development rights.

How has the scheme performed?

In the financial year 2020-21, against a total allocation of INR 12,000 crore; an amount of INR 11,830 crores was released to states. 

Similarly in the financial year 2021-22, against the Budget Estimate of INR 10,000 crore; capital projects costing INR 9,115 crore were approved till 3rd February 2022, and a total amount of INR 5,301 crores were released to states. This helped in boosting capital investment and completion of several capital projects.

It also helped in the completion of many citizen-centric reforms. While 17 States completed One Nation—One Ration Card reforms, 20 States completed Ease of Doing Business reforms. 

Local Body Reforms were completed by 11 States and Power Sector Reforms were partially or fully completed by 17 States. Completion of the reform process by the States was certified by the Ministries concerned.

Twenty-three States carried out reforms in at least one of the four identified areas. Two States, Kerala and Uttarakhand completed reforms in all the four identified areas. 

What are the challenges surrounding capital expenditure?

High Revenue Expenditure Commitments: In 1990, revenue expenditure formed 73% of the Government spending, while in 2021, revenue expenditure formed 84% of Government spending. The growing demand for revenue expenditure in budgets is largely responsible for not reaping the higher multiplier effects of capital expenditure.

Missing Target of Disinvestment: The government missed the last year’s disinvestment target of INR 1.75 lakh crores that resulted in reduced flow of capital receipts to the exchequer. It reduced the money available for incurring capital expenditure. 

Global Uncertainties: The intensification of Russia-Ukraine crisis and the subsequent western sanctions would curtail flow of cheap inputs and resources from Russia. This will increase cost of production and the need of more capital expenditure in comparison to previous levels. In addition, rise in the price of commodities especially oil will increase import bill putting burden on government’s finances.

Pandemic Pressure: The government is running many schemes to support the poor and marginalized from the after-effects of Pandemic. This has put a significant stress on its capital spending.

Macroeconomic Stress: The inflation levels in the country are quite high and are expected to increase if the Russia- Ukraine crisis is not solved immediately. Further the fiscal deficit would be around 6.9% in 2021-22, indicating a higher interest to be paid in future thereby reducing the amount available for future capital expenditure.

What more should be done?

First, the states should adopt good practices from each other for achieving efficient outcomes e.g., Kerala and Uttarakhand have completed reforms in all four identified areas of the SSASCE and their experience can be implemented across states.

Second, the states should curtail leakages in their spending using innovative tools like JAM trinity and rationalize their revenue expenditure. They should keep in mind that revenue expenditure has a multiplier effect of 0.90-0.99 which is way less than capital expenditure.

Third, the government should do a cautious evaluation of the ask price for the PSUs up for disinvestment. Highly skilled professional and investment bankers should be consulted before finalizing the sale price. This would increase the probability of sale and help in meeting the disinvestment targets increasing funds available for capital expenditure. 

Fourth, the government should also review its direct and indirect tax systems. The complexities should be removed to ensure greater compliance and prevent tax evasion. Further the list of deductions and exemptions should be reduced for greater tax revenue.

Fifth, the government should also focus on lucrative sources of revenue generation e.g., 30% tax on profits earned from cryptocurrencies and other virtual digital assets in this year’s budget is a welcome step in this regard. 

Conclusion

It is expected that with a massive allocation of INR 1 lakh crore, the third and drastically improved version of the SSASCE 2022-23 would be a game changer. It will not only spur capital investment and economic growth through the multiplier effect, but will also accelerate the movement of States on the reform path outlined by the Finance Minister in her budget speech. However the government should also focus on improving its revenue generation so as to fund its commitments.

Summary in Graphics

Impact of Capex on Economy The image depicts the working of the Multiplier effect

About SSASCE The image depicts challenges to enhance CAPEX

The image depicts way to enhance CAPEX

Source: Yojana March 2022

Print Friendly and PDF