Why governments are unable to reap benefits of higher capital expenditure multiplier


In India, the capital expenditure multiplier is around 2.45, while the revenue expenditure multiplier is 0.99. Thus, for a Rs. One crore increase in capital expenditure by the Government, GDP increases by Rs. 2.45 crores, where as if there is a Rs. One crore increase in revenue expenditure, the GDP increases only by Rs.0.99 crore. It is crucial to note why Governments are constrained to increase the proportion of capital expenditure in relation to total even though the multipliers are high.

Revenue expenditure of the Government includes expenditure incurred in operation and maintenance of Government departments, such as salaries, pensions, subsidies, grants, interest payments on debts which are regularly incurred, recurring in nature and do not result in creation of assets. Capital expenditure includes a long-term expenditure, non-recurring in nature such as creation, acquisition of capital assets such as infrastructure, construction of roads, buildings, machinery, railway lines, airports, investment in shares, loans by Central Government to State Governments, repayment of loans, which all add to capital stock of the economy and raises economy’s capacity to produce more. Repayment of loan is capital expenditure since it reduces liability.

The proportion of capital expenditure and revenue expenditure over years from 1990 to 2021 indicates that in 1990, revenue expenditure formed 73% of the Government spending, while in 2021, revenue expenditure formed 84% of Government spending. On the other hand, the Capital expenditure formed 27% of the Government spending in 1990, while in the 2021, capital expenditure formed 16% of Government spending. Thus, the proportion of Capital expenditure (Revenue expenditure) has fallen (risen) from 27% (73%) in 1990 budget to 16% (84%) in 2021 budget. However, the growing demand for revenue expenditure in budgets is largely responsible for not reaping the higher multiplier effects of capital expenditure. Unless all stakeholders including farmers realize and appreciate this crucial aspect, Governments will not be able to provide funds for infrastructural development in rural areas, vital for the welfare of farmers.

The marginal propensity to consume with respect to current income is 0.60, implying a multiplier value of 2.5. Thus, a one per cent increase in, government spending or autonomous private investment will increase income by 2.5 per cent, private final consumption by 2.5 percent, Govt final consumption by 1.2 percent and overall consumption by 3.9%. The steps to benefit from high MPC are crucial for the economy. Considering accelerators, a unit increase in government spending yields the highest dynamic income multiplier effect for manufacturing at 4.73, followed by services at 4.12 and agriculture at 3.89. Therefore, greater investment needs to be directed towards manufacturing so as to revitalise growth. Thus, efforts to revive MSMEs is crucial as MSMEs contribute to 45% of output of manufactured goods and contribute to 40 per cent of the total exports contributing to 8 percent of the GDP.

India collects only 0.2% of GDP as property tax, while OECD collects 1.08%. On an average, only around 50% of the urban properties are taxed to around only 50% of their potential, an immense potential exists to generate tax revenues. In addition, the extent of property tax exemption is 10 percent of assessed properties in India and varies from 40% in Bengaluru to 60 percent in Delhi. It is crucial for the Government to take steps to raise tax revenues from Urban Local Bodies (ULBs) since more than 70% of tax revenues are generated in urban areas.

India’s economic performance is also due to the presence of a vast network of Nationalized Banks which played a key role in India’s green revolution as primary sector lending which should form at least 20% of the total lending is crucial for development even to this day. Our Banking system is unique and has added to the investor confidence in multifarious manner and it is the responsibility of the Government and RBI to repose and enhance the faith of all investors. The NPAs are also due to sickness of industries and there are programmes for nursing the sick units. Thus, the responsibility of increasing NPAs is cumulative as the Government, the RBI, the Bank Management and the Public are the stakeholders in the process. While there are efforts to rescue Private Banks such as Yes Bank, it is equally the responsibility of the Government and the RBI to rescue, revitalize Nationalized Banks and not privatize / disinvest. Even merger with existing nationalized banks by various means including injecting professional management is crucial to retain banking infrastructure with the Government towards the welfare of agriculture, rural development and other primary sectors of the economy, which still need the attention of the Government.

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Views expressed above are the author’s own.



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