Budget boosters: How hike in capex translates to investor benefits

The increased capex by the government will have a multiplier effect on the economy and bring about more private sector activity in infrastructure initiatives.

By P Saravanan and Narend Subramanian

Budget 2022 has a strong focus on capital expenditure (capex), thereby giving an impetus to higher spending on highways and infrastructure among others. The effective capital expenditure in this Budget has shown a significant increase of 35 % over the previous year. The government has adopted the policy of increased capital expenditure to boost the economy especially when the private sector has been hesitant to increase the capex allocation. Let us discuss in detail on how the capex spending by the government is going to benefit the investors.

Capex by government and its relevance

Capital expenditure is the money spent by the government on the acquisition and or development of machinery, building, health facilities, education, etc. It includes the expenditure incurred on acquiring fixed assets, upgrading, or repairing existing assets and the benefits of such expenses are expected spread over a future period.

Capital expenditure leads to the creation of long-term assets and allow the economy to generate revenue for many years by adding or improving production facilities and boosting operational efficiency. 

The Covid -19 pandemic has stalled the economic growth of many countries and India has been no exception. The pandemic has played havoc and has continued to manifest itself in the form of several variants. Thus, capex spending by the government enhances labour participation in the economic activities, prop up domestic consumption, and has a multiplier effect. The multiplier effect of Re 1 spent on capital expenditure is as high as 2.45 as against any revenue expenditure wherein the impact multiplier effect is just 0.99 and the cumulative multiplier effect of capex is 4.80.

Sectors to focus

The proposed outlay for capex has been raised by 35.4% from Rs 5.54 trillion in the current fiscal year to Rs 7.50 trillion in FY23. The Gati Shakti scheme will bolster the logistics and transport related growth. The real estate sector has not been in great shape over the last few years and the increased capital expenditure would give a fillip to the affordable housing sector. The importance given to green energy, semiconductor and other artificial intelligence technology has huge potential to revolutionize future growth.

The increased capex by the government is expected to increase the opportunities for the private sector to participate in myriad infrastructure initiatives such as highways, construction of new roads, housing, and drinking water projects among others. The budget has allocated Rs 60,000 crore to extend the tapped water coverage to 38 million households.

The real estate sector under the Pradhan Mantri Awas Yojana would see construction activities increasing under the affordable housing scheme. Under this scheme an outlay of Rs 48,000 crore has been earmarked to facilitate construction of affordable houses. Further, multimodal logistics parks at four locations will be awarded in PPP mode and moreover 100 cargo terminals are expected to be developed during the next three years.

To conclude, the Indian economy is slowly emerging from the Covid-19 uncertainties and the current Budget hopes to revitalize the recovery process through increased government spending.

The capex by the government is expected to invigorate the infrastructure, railways, housing, and other sectors and investors should choose their stocks accordingly keeping in mind the risk associated with the individual firms.

Saravanan is a professor of finance and accounting, IIM Tiruchirappalli and Subramanian is a guest professor at IIT Jodhpur and a quant risk management specialist. Views are personal.