14 May 2024

MAINS DAILY QUESTIONS & MODEL ANSWERS

Q1. What does capital expenditure mean? Examine the effects that the Union Budget’s emphasis on capital spending will have on the Indian economy.

GS III – Economy-related issues

Introduction:

• There are two categories of government spending: capital and revenue. Revenue expenditure is the amount the government spends on liabilities and operating costs. This includes pay and benefits including pensions, salaries, interest on loans, grants to state governments, and subsidies. Capital expenditures are financial outlays for the creation or acquisition of fixed assets, such as machinery, equipment, buildings, land, investments in stock, healthcare facilities, educational programmes, and new weapons. Revenue expenditures are recurring in nature, whereas capital expenditures build assets for the future.
• In an attempt to spur private investment and establish a “virtuous cycle of investment,” the Union Budget increased capital expenditure by 35.4% to Rs 7.5 lakh crore, or 2.9% of GDP, in the upcoming fiscal year.
• The effective capital expenditure for the upcoming year is projected at Rs 10.67 lakh crore, which is 27% larger than the RE of 2021–22 at Rs 8.40 lakh crore, when combined with grants in aid for the creation of capital assets (including MNREGA works).
• Moreover, the “Effective Capital Expenditure” is projected to be Rs 10.68 lakh crore in 2022–2023—roughly 4.1% of GDP—after accounting for the capital expenditure (Capex) and the provision provided for the building of capital assets through Grants-in-Aid to States.
• Eight ministries and agencies oversee the majority of capital expenditures (capex), of which 1.9% is devoted to atomic energy, 7.2% to telecommunications, 20.3% to defence, 14.9% to transfer to states, 1.4% to police, 3.6% to housing and urban affairs, 18.3% to railroads, and 25.0% to road transport and highways.

The Indian economy would be affected by the Union Budget’s emphasis on capital expenditure:

• Long-term capital expenditures, which result in the formation of assets, enable the economy to produce income for many years by expanding or upgrading manufacturing facilities and increasing operational effectiveness.
• The construction of capital assets multiplies the impact on the economy and results in the creation of value.
• Additionally, it improves worker participation, assesses the state of the economy, and expands the economy’s potential for future growth.
• The increase in capital spending will have a significant positive impact on the economy and attract more private investment, which will promote employment growth.
• A virtuous investment cycle is anticipated to rebound thanks to capital expenditures and a surge in private investment.
• By generating jobs, increasing demand for professional services, manufactured inputs from MSMEs and large industries, and improved agri-infrastructure, capital investments contribute significantly to a swift and long-lasting economic recovery and consolidation.
• Private capital expenditure is stimulated by higher government spending as well, through the issuing of more contracts.
• Repayment of a loan is capital expenditure in addition to asset creation because it lowers obligation.
• The government must exercise caution when allocating funds, though.
• States do, however, play an equally significant role in capital expenditures. They are more accountable than the national government for capital formation. States must increase their capital expenditures in order for public investment to prosper.

Q2. India’s advancements in payment systems will serve as a valuable foundation for the country’s financial institutions and citizens to use a cutting-edge central bank digital currency (CBDC). However, considering how it affects the formulation of macroeconomic policy, a thorough testing procedure is required to ensure that the effects on the banking system and monetary policy are kept to a minimum. Examine.

GS III – Economy-related issues

Introduction:

• The digital equivalent of a nation’s fiat currency is known as a Central Bank Digital Currency (CBDC) or national digital currency. Electronic tokens are issued by the central bank in place of paper money or coins. The government’s whole trust and credit is behind this token value.
• In order to assist fine-tune its approach for launching a full-scale central bank digital currency (CBDC), the Reserve Bank of India is expected to shortly launch pilot programmes to evaluate the feasibility of using digital currency to conduct wholesale and retail payments.
• The Reserve Bank of India (RBI) will introduce a central bank digital currency (CBDC) in 2022–2023, according to the Union Finance Minister’s budget address. This is the first formal announcement on the introduction of the eagerly awaited digital currency from the Union government.

The necessity of a CBDC:

• The emergence of cryptocurrencies like Ethereum, Bitcoin, and others has put fiat currencies under pressure.
• Each nation’s central bank investigated the prospect of launching its own digital currency due to these and other weaknesses.
• According to a 2021 BIS study, 14% of central banks were implementing pilot programmes, 86% were actively investigating the possibility of such currencies, and 60% were experimenting with the technology.
• Since interbank settlement would constitute a transfer of central bank liabilities from one party to another, it would no longer be necessary.

Possibility of a CBDC:

• Real-time payments without the need for interbank settlement would be possible with an official digital currency, which would also lower the cost of currency management.
• Another advantage of CBDC is that, to the extent that it can replace big cash usage, the cost of printing, shipping, and keeping paper currency can be significantly decreased. This is especially true given India’s relatively high GDP ratio.
• Being a digital version of money, it can offer a productive means of conducting business. Additionally, digital currency eliminates the problems associated with cash and coins. Coins and cash have inherent security hazards, such as the recent RBI money chest theft, and require additional costs for storage.
• In the globe, there are over 3,000 privately issued cryptocurrencies. The main goal of proposing government digital currency, according to the IMF, is to impede the expansion of private digital money.
• These businesses could file for bankruptcy if they don’t have any protection. Both the creditor and the investor will suffer a loss as a result. However, in the event of a financial crisis, the government will support the national digital currency.
• The private sector can invest in the related infrastructure with confidence and no concerns about regulation because the state-backed digital currency can offer investor and consumer protection. People’s services will be improved as a result.
• The RBI will oversee the regulation of the country’s digital currency. As a result, volatility will be lower than with other digital currencies.
• It is possible to expand the RBI’s current inflation targeting efforts to include national digital currencies. Given that India intends to outlaw additional cryptocurrencies, the RBI can more effectively oversee both fiat and digital currency. Consequently, switching to digital money and maintaining macroeconomic stability.
• A country’s central bank would be able to track the precise location of each unit of currency with the implementation of CBDC, which would prevent money laundering.
• Criminal activity, such as financing terrorism and money laundering, is quickly identified and stopped.

Issues raised:

• India is now dealing with a lot of cyber security risks. The introduction of virtual currency may lead to a rise in cyberattacks, which could jeopardise digital theft similar to the collapse of Mt. Gox.
• Roughly 90% of Indians lack digital literacy, according to a 2018 research from the Digital Empowerment Foundation. Thus, the advent of digital currency would provide the Indian economy with a number of new issues if there is insufficient literary awareness raised.
• The introduction of digital money also brings with it a number of related difficulties with regard to taxing individuals, tracking investments and purchases, and regulation.
• In order for an individual to verify that he is the rightful owner of a digital money, the digital currency has to gather some basic personal data about that person. Sensitive information like a person’s identify or fingerprints may be included in this basic data.
• Important choices need to be taken regarding the currency’s design, including how it will be issued, how anonymous it will be, what kind of technology will be employed, and other factors. Without a doubt, the adoption of national digital currency advances India’s digital economy and mitigates the risks connected to privately held cryptocurrencies. But before implementing, the government must establish the required protections. India must proceed with the introduction of a national digital currency.