Capital Expenditure & Economic Growth: Despite a rising capex push, India's revenue-to-capital expenditure ratio remains at approximately 77:23. What structural reforms are needed to improve this ratio?

Question

PocketIAS · Accepted Answer

Introduction:

With a revenue-to-capital expenditure ratio of ~77:23, improving the quality of spending requires reforms that go beyond incremental reallocations.

Body:

A primary constraint is the high burden of committed liabilities—interest payments (over 40% of revenue receipts), salaries, and pensions—which pre-empt fiscal space. Structural reform must therefore include debt consolidation and reduction, alongside pension reforms (e.g., rationalising old pension liabilities, expanding NPS coverage). Second, subsidy rationalisation is critical: better targeting through DBT, periodic pruning of non-merit subsidies, and aligning prices (fertiliser, power) with costs can release resources for capex. Third, enhancing revenue mobilisation—through broadening the tax base, improving GST efficiency, and reducing exemptions—can create fiscal headroom without compressing essential spending.

Institutional reforms are equally important. Adopting outcome-based budgeting and sunset clauses for schemes can curb inefficient revenue expenditure. Strengthening public financial management systems and reducing off-budget liabilities will improve transparency and prioritisation. Additionally, leveraging asset monetisation and public-private partnerships (PPP) can supplement public capex without straining budgets. At the state level, incentivising capex through conditional transfers can improve aggregate public investment, given states’ larger spending role.

Conclusion:

Improving the revenue–capex ratio requires a combination of expenditure rationalisation, revenue strengthening, and institutional reforms—ensuring that fiscal policy shifts durably toward growth-enhancing investment rather than consumption.

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