RBI Study: Capex Multiplier, Fiscal Limits and Populism Risk
Why in the news
An RBI study looked at how government spending drives long-run growth, especially infrastructure, and the fiscal strains around it.
Key facts
- Public spending is vital for infrastructure-led growth, but budgets must balance running costs with social and physical infrastructure.
- Capex has a much higher multiplier than revenue expenditure, and its growth effect lasts longer.
| Period | Capex / GDP |
|---|---|
| 1991-96 | Fell from 1.7% to 1.2% amid fiscal constraints |
| 2003-08 | Rose to 2.2% after fiscal reforms |
| 2013-20 | 1.3% to 1.6%, post global financial crisis |
| 2024-25 (BE) | 4.6%, lifted by post-pandemic recovery measures |
Concerns
- Persistently high general government debt.
- Need for more revenue to sustain capex; GST rationalisation is one option.
- Private investment stays weak despite higher public capex.
- State-wise populist schemes driven by politics endanger fiscal gains.
Way forward
- Keep capex momentum with fiscal prudence.
- Revive private investment and ease business issues.
- Broad political consensus to balance welfare and sustainability; policy stability and fiscal discipline are key.
Exam angle
- Capex versus revenue expenditure: capex has the larger multiplier.
- Peak figure: 4.6% of GDP in 2024-25 BE.