States should prioritise capital expenditure
The growth and development which we see today in the US and European countries, is setting a precedent for how strategic investments can drive prosperity. As India works towards achieving a US $5-trillion economy, the need for capital investment is necessary.
In the evolving era of the Indian economy, the central government is emphasising growth-oriented budgets that prioritise capital expenditure, often referred as Capex, to boost demand and consumption. Capital expenditure involves spending on long-term assets such as infrastructure, buildings, machinery and technology, as these are a major component, and have a multiplier effect on the economy. By investing in these areas, the government is stimulating various sectors of the economy.
The recent budget allocates Rs 11.11 lakh crore towards Capex, accounting for 3.4 per cent of India’s GDP. This will induce demand for services and manufactured inputs from large industries and micro, small and medium enterprises (MSMEs). Farmers are getting better access to storage facilities which helps them to export their agricultural products. The expansion of highways and establishment of new cargo terminals enhanced competitiveness of Indian industry by lowering the cost of transportation and bettering connectivity between production centres and consumption markets, both domestic and global.
Over the last decade, there has been an unprecedented 390 per cent increase in Capex allocation, leading to the creation of ample job opportunities. Infrastructure projects such as Bharat Mala Pariyojana and Sagarmala, the doubling of the number of airports, the provision of affordable housing facilities to 34.59 crore people through the PM Awas Yojana, and the construction of 12 crore Individual Household Latrines under the Swachh Bharat Yojana, building seven new IITs, eight new IIMs, 390 new universities, 15 AIIMs and 700 medical colleges are the prime examples of how strategic investments can lead to the sustainable development.
Further, it is essential for the government to invest in human capital as it leads to the development of the economy by enhancing workforce skills and productivity, thereby driving economic growth. Thus, in the current budget, the central government has announced the PM’s package which includes five schemes and initiatives to create employment, skilling, and opportunities for 4.1 crore youth over five years, with a central outlay of Rs 2 lakh crore. In addition to that 1.17 lakh startups have created over 12.42 lakh direct jobs.
Furthermore, the RBI reported that the country added 4.67 crore jobs in FY24 totalling 64.33 crore jobs indicating significant employment growth. India’s employment rate grew by 6 per cent in FY24, up from 3.2 per cent in FY23. Improved infrastructure and facilities have also attracted investments from both domestic and foreign investors, resulting in FDI inflows reaching US $667.41 billion by March 2024.
While the central government has made significant strides in increasing Capex, it is imperative for state governments to also prioritise capital expenditure in their budgets. Investing in infrastructure projects and urban development can significantly boost local economies by creating jobs and attracting businesses. Investment in affordable housing projects provides shelter to the needy and creates numerous construction and allied jobs. Focusing on rural infrastructure development, including roads, irrigation, and digital connectivity, creates jobs which reduces urban migration, enhances agricultural productivity, and promotes rural industries.
By investing in capital expenditure, states can generate sustainable employment, reducing the need for temporary relief measures. Sustainable employment ensures a steady income for individuals, improving their standard of living and reducing dependency on government handouts. Investing in infrastructure and other long-term assets can enhance economic stability by creating a robust and resilient economy. Improved infrastructure and facilities make a state more attractive to private investors. Foreign and domestic investments can stimulate economic activity, create jobs, and generate revenue for the state. Capital expenditure projects can ensure more inclusive and equitable growth by providing opportunities for all sections of society.
A balanced approach is crucial to ensure that capex levels support long-term economic growth while avoiding excessive debts and fiscal imbalances. States should take proactive steps to increase their Capex allocation and focus on long-term economic development. Moving away from freebies and investing in sustainable projects can create a self-sufficient and empowered population. The vision of a prosperous and resilient economy can be realised through the concerted efforts of both the central and state governments in prioritising capital expenditure and working in tandem .
Sumeet Bhasin
Director, Public Policy Research Centre
Posts on X: @sumeetbhasin