GS Paper 3
Syllabus: Govt budgeting (capital expenditure)
Source: PIB
Context: The Department of Expenditure, Ministry of Finance, has approved capital investment proposals of Rs. 56,415 crore in 16 States in the current financial year.
Approval has been given under: The scheme entitled ‘Special Assistance to States for Capital Investment 2023-24’.
What is capital expenditure (capex)?
- It includes money spent by the government on the development/upgrading/repairing of physical assets (like health and education facilities), acquiring fixed and intangible assets, repayment of loans, etc.
- Capex of the government has been the prime driver in the economy (in recent years) because the private sector has not been in a position to invest due to poor demand and high inflation.
- In FY23, the Centre’s capital expenditure exceeded the government’s revised estimate of Rs 7.28 lakh crore by Rs 8,551 crore.
Significance of capex:
- Long-term in nature, leads to the creation of assets and allows the economy to generate revenue for many years.
- Add or improve production facilities, increases labour participation, boost operational efficiency and raise the capacity of the economy to produce more in future.
- Repayment of loan reduces liability.
Capex vs revenue expenditure: Revenue expenditure (salaries of employees, interest payment on past debt, subsidies, pension, etc) is recurring in nature and neither creates assets nor reduces any liability of the government.
Concerns: Conflict between capex and public spending. For example, when capex was 14.2% of Budget Estimates in the FY 2019-20, the government had to cut public spending sharply in order to meet its deficit target.
| The Special Assistance to States for Capital Investment 2023-24 Scheme | |
| About | The scheme was announced in the Union Budget 2023-24 to give special assistance to the State Governments in the form of a 50-year interest-free loan up to an overall sum of Rs. 1.3 lakh crore during the FY 2023-24. |
| Need | It was launched in view of a higher multiplier effect of capital expenditure and in order to provide a boost to capital spending by States. |
| Background | The scheme was first instituted in 2020-21 in the wake of the COVID-19 Pandemic. The flexibility and simplicity of the scheme design have earned praise from States. Hence, a similar scheme was also executed by the Ministry of Finance in the last financial year. |
| Components | Part-I is the largest component with an allocation of Rs. 1 lakh crore. It has been allocated amongst States in proportion to their share of central taxes and duties as per the 15th Finance Commission. |
| For Part–II, Rs. 3,000 crore has been set aside for providing incentives to States for scrapping State Government vehicles and ambulances, etc. | |
| Part–III & IV aims at providing incentives to States for reforms in Urban Planning and Urban Finance. | |
| Part V aims at increasing the housing stock for police personnel and their families within the police stations in urban areas. | |
| Part VI promotes national integration, Make in India and One District, One Product (ODOP) through the construction of Unity Mall in each State. | |
| Part VII provides financial assistance to States for setting up libraries with digital infrastructure at Panchayat and Ward levels. | |
| Need for special assistance to states in the current FY | Many states, led by Andhra Pradesh, Maharashtra, UP and Kerala, failed to meet the target in terms of actual capex. According to a Bank of Baroda report, out of 25 states as many as 14 states met less than 75% of the target in FY2023. |
