John Maynard Keynes famously remarked, “In the long run, we are all dead”. But in the short run, without capital expenditure, we are all just stuck in a low-equilibrium growth trap. Public investment in infrastructure, energy, and digital connectivity is the fundamental driver of productivity gains, crowding in private investment through enhanced factor mobility and network externalities. Yet, capital expenditure is often treated like a countercyclical stimulus—announced with great fanfare but under-executed due to fiscal constraints and bureaucratic inertia. Empirical studies (Aschauer, 1989; Calderón & Servén, 2010) show that well-targeted public investment yields high output multipliers, particularly in developing economies, by lowering transaction costs and improving total factor productivity. Without sustained capital formation, an economy risks stagnating in a high-cost, low-productivity equilibrium—effectively turning Keynes' long-run fatalism into a self-fulfilling prophecy.
A Stronger Multiplier Effect
Empirical evidence strongly supports the argument that capital expenditure has a significantly higher multiplier effect compared to other forms of government spending. In the Indian context, several studies have attempted to quantify this impact, with one of the most widely cited being the research by Sukanya Bose and N.R. Bhanumurthy. Their study evaluates short-run fiscal multipliers by introducing shocks to various fiscal instruments, including expenditures and taxes. The findings reveal that the multiplier for capital expenditure stands at 2.45, whereas transfer payments and other revenue expenditures yield significantly lower multipliers of 0.98 and 0.99, respectively. Tax multipliers, on the other hand, range around -1, indicating a contractionary impact. Even when factoring in fiscal consolidation targets, the results consistently highlight the substantial positive effect of capital expenditure on output.
A recent RBI study further reinforces this argument by analysing state-level expenditure multipliers using a Structural Vector Autoregressive (SVAR) model covering 31 states and Union Territories from 1990-91 to 2023-24. The findings indicate that while the impact multiplier of revenue expenditure ranges between 0.60 and 1.74, with a peak effect lasting only a year, capital outlay exhibits a far more durable and potent effect. Its impact multiplier is estimated between 2.13 and 2.71, with peak values ranging from 5.32 to 7.61. Moreover, the cumulative multiplier for revenue expenditure stands at 1.43, nearly a third of the 3.84 multiplier for capital outlay. Unlike revenue expenditure, which provides only a transient boost to GDP, capital expenditure has a prolonged impact, with effects persisting for up to five years. These findings validate the hypothesis that while a short-term reduction in revenue spending may temporarily dampen growth, the long-term gains from higher capital outlays far outweigh this loss. Given this evidence, prioritising capital expenditure is crucial for sustained economic expansion as it delivers significantly higher returns in terms of output growth and development.
Why We're Running Behind This Time
India's capital expenditure trajectory reflects a deliberate focus on infrastructure-led economic growth, underpinned by theoretical frameworks such as Keynesian multipliers and the Harrod-Domar model of capital formation. Effective capital expenditure, emphasising investments in public goods like roads, schools, and healthcare, has surged from ₹4.5 lakh crore in 2016–17 to a projected ₹15 lakh crore in 2024–25, signalling a threefold increase over less than a decade. Overall capital expenditure has grown from ₹2.8 lakh crore in 2016–17 to ₹11.1 lakh crore in FY25 (budget estimate), representing 3.4% of GDP. Complementing this, grants-in-aid for capital assets—a tool for addressing fiscal imbalances and promoting regional development—rose from ₹1.7 lakh crore in 2016-17 to an estimated ₹3.9 lakh crore in FY25.
However, for FY25, we are running a bit behind the budgeted estimate of 11.1 lakh crores. Being an election year, capital expenditure up to November 2024 stood at only 1.6% of GDP, compared to 2.0% during the same period in 2023, as per data from the Controller General of Accounts. While there was some improvement in capital spending by November compared to earlier months, it remained at just 46.2% of the budgeted estimate. In absolute terms, the number is just 5.13 lakh crore. Of course, this has also helped the central government reduce its fiscal deficit, but it makes it difficult for the government to reach the target of 11.11 trillion in capex for 2024-25. With the bulk of capital expenditure pushed to the final quarter, ministries will face a significant challenge in surpassing last year's capex of ₹9.48 lakh crore. Achieving even that level of spending will require extraordinary efforts. But it is not intractable.
Some Sectors Are Saturated
Disaggregated data reveals that six sectors—roads, railways, defence, telecom, transfers to states, and new schemes—accounted for over 90% of total capex in 2024-25, an increase from 87% in 2023-24. However, the overall decline is primarily driven by a sharp contraction in two high-expenditure areas: road infrastructure (-16%) and defence (-15%), which collectively represent over 40% of the total capex envelope. This raises critical concerns regarding the expenditure-absorptive capacity of these sectors, particularly given their long gestation periods and the importance of infrastructure-led growth multipliers. The railways, in contrast, exhibited relative resilience, with a mere 1% decline in capex to ₹1.68 trillion. Transfers to states for capex, including externally aided projects, increased by only 5%, significantly trailing the budgeted 41% rise, marking the first potential contraction in this fiscal instrument since its introduction. While this has yet to manifest in severe fiscal distress for subnational governments, state-level capex (covering 95% of state and Union Territory outlays) grew by a marginal 1%, with Andhra Pradesh, Kerala, Uttar Pradesh and others registering declines. Given the high fiscal multipliers associated with public investment, a sustained contraction in both central and state capex poses a material risk to medium-term growth, with implications for potential output, employment elasticity, and private sector crowd-in effects. Further, two additional sectors accounting for 13% of total capital outlay illustrate persistent structural constraints in capex execution, reflecting delays in project clearances, weak coordination, and liquidity constraints affecting implementation timelines.
The government has realised that capital expenditure has been lagging over the last few months and has now pushed the pedal and nudged ministries to speed up the spending. One reason for this would be the issues with the administrative capacity of some ministries to manage large-scale investments efficiently. Even with frontloading of funds, ministries often struggle with project execution, leading to a bunching of expenditure in the later quarters, which diminishes efficiency and limits the effectiveness of countercyclical fiscal policy.
Why Some States Perform Better
Another key dimension of state capacity is the efficiency of intergovernmental fiscal transfers. The Centre has increasingly relied on pushing funds to states to accelerate capex, yet variations in state-level administrative capacity mean that some states are better positioned than others to absorb and deploy funds.
The government should continue prioritising capital expenditure in the upcoming budget, as it remains a crucial driver of economic growth. However, it is important to recognise that certain ministries, particularly those overseeing large-scale infrastructure projects like road transport and highways, may eventually reach a saturation point where additional investments yield diminishing returns. To maintain the momentum of public investment, new avenues for capital expenditure must be explored.
The next phase of capital expenditure should be strategically directed toward urban infrastructure, including cities and peri-urban areas that may not yet be officially classified as urban. This includes strengthening sanitation systems and expanding and modernising sewage networks. Additionally, affordable housing projects should be scaled up to address the growing demand for urban accommodation. Investment in public transport can enhance mobility.
This is just an indicative list. We need more such avenues.
(Aditya Sinha is a public policy professional.)
Disclaimer: These are the personal opinions of the author
