Capital expenditure has emerged as the centrepiece of Union Budgets since 2020. Evaluate its multiplier effects and the crowding-in/crowding-out debate.
Subtopic: Economy · Government Budgeting
How to structure your answer
Introduction: Union Budget 2025-26 pegs capex at ₹11.21 lakh crore (3.1% of GDP), up from 1.7% in FY20; effective capex (incl. grants in aid) at ₹15.48 lakh crore.
Body: 1) Multiplier — RBI staff studies place infrastructure capex multiplier at 2.45x within four years. 2) Crowding-in private investment — capacity utilisation 74-76% (RBI OBICUS Q2 FY25). 3) Crowding-out concerns — high G-Sec yields, state capex slippage. 4) Quality — front-loading, absorptive capacity, PFMS lags.
Way forward: Tie state capex loan (50-year interest-free) to Gati Shakti compliance; expand Asset Monetisation Pipeline (₹6 lakh crore Phase 2); strengthen Public Investment Board appraisal.
Written within the word limit
136 words · target 150 words · 9 min
Introduction: Union Budget 2025-26 raises Centre's capital expenditure to ₹11.21 lakh crore — 3.1% of GDP and the highest in two decades; capex has tripled from ₹3.4 lakh crore in 2020-21.
Body: NIPFP (2023) estimates a fiscal multiplier of 2.45 for capital expenditure against 0.45 for revenue spending. RBI's State Finances 2024-25 confirms the crowding-in effect: every ₹1 of Centre capex catalyses ₹2-2.5 of private investment over two years in steel, cement and logistics. Centre-State coordination has been institutionalised through the 50-year interest-free Special Assistance for Capital Investment (₹1.5 lakh crore FY26). Crowding-out concerns rise when fiscal deficit exceeds 6%, but the 10-year G-sec has eased to 6.4% (RBI Bulletin April 2026), limiting displacement. Productivity gains accrue through PM Gati Shakti, Bharatmala and Sagarmala.
Way forward: The Ministry of Finance should maintain Centre capex above 3% of GDP through FY28 and notify a National Capex Outcome Tracker by FY27.
What an examiner expects to see
- Capex ₹11.21 lakh crore FY26 (3.1% of GDP)
- Effective capex ₹15.48 lakh crore
- RBI capex multiplier ~2.45 over four years
- Capacity utilisation 74-76% (RBI OBICUS)
- States' 50-year interest-free loan ₹1.5 lakh crore FY26
- National Asset Monetisation Pipeline Phase-1 ₹6 lakh crore
- Gati Shakti review of multi-modal projects
Concrete cases, schemes and judgments
- Bharatmala Pariyojana
- Dedicated Freight Corridors
- Sagarmala port modernisation
- Vande Bharat trains