Capital Expenditures and Revenue Expenditures

Subject – Economy

Context – Most States increase their capex but fail to rein in revenue expenses.

Concept –

With growth being severely impacted by the pandemic and private capital expenditure showing no signs of picking up, the Centre had resolved to increase its capital expenditure substantially for FY22 and had also nudged States to do likewise.
- It has also been incentivising States to increasing their capex spending through enhanced ceilings for borrowings and interest-free loans.

Capital expenditure, by its nature, has a high multiplier effect with an ability to crowd-in private investments which in turn enhances the production capacity leading to higher economic growth and employment generation.
It is for this reason that the Centre has been constantly nudging States to boost their capital spending, especially to regain growth in the aftermath of the global pandemic.
Moreover, the States’ capital expenditure has higher growth multiplier potential than the Centre as it is related closer to the local community.
In April 2021, the Centre announced that it will provide an additional amount of up to ₹15,000 crore to States as interest free 50-year loan for spending on capital projects including ₹5,000 crore if States undertake asset monetisation and disinvestment of their public sector enterprises.
- The scheme was in continuation to last year’s 50-year ₹12,000-crore interest-free capex loan provided to States to be spent on new or ongoing capital projects under the ‘AtmaNirbhar Bharat package’.

Speaking at a webinar recently, India’s Chief Economic Advisor, KV Subramanian criticised the State governments for spending taxpayers’ money on revenue expenditure in the form of freebies and populist schemes.
- He asked the them to instead focus on ushering supply side reforms and increase capital expenditure to attract private investment and spur growth.
Citing a study by the National Institute of Public Finance and Policy (NIPFP), Subramanian highlighted that for every rupee invested in revenue expenditure, the multiplier for the economy is between 92-98 paise while in case of capital expenditure, for every rupee put in, the addition to the economy is ₹2.25 rupees within the same year and ₹4.80 over the course of the entire capital expenditure.

Capex in social sector

Both revenue and capital expenditures of States are classified under general, social and economic sectors. Not surprisingly, a bulk of the State’s capex spending went into the social sector which includes spending on building healthcare infrastructure and education. Many States have ramped up hospitals and emergency facilities to manage the Covid crisis.
The economic sector expenses cover infrastructure spending on roads, railways, ports and other growth-fuelling economic activities while the general sector captures all other expenses.

To know more about Capital expenditures, please click here and here.

Revenue Expenditure

Revenue expenditures are the expenditures incurred for the basis other than the creation of physical or financial assets of the central government.
These are associated with the expenses incurred for the normal operations of the government divisions and various services, interest payments on debt sustained by the government, and grants given to state governments and other parties (even though some of the endowments might be meant for the creation of assets).