Capex-led growth
- February 1, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Capex-led growth
Subject :Economy
Section : Fiscal Policy
Context: Capex-led growth to bring back animal spirits, help manage debt levels: Economic Survey.
More on the News:
- Survey said the government’s thrust on capex, particularly in the infrastructure-intensive sectors like roads and highways, railways, and housing and urban affairs, has longer-term implications for growth.
- Central to the government’s growth optimism in FY24 is the expectation of a recovery in private capex, driven by improved balance sheets, resurging credit, and the crowding in from public capex.
- Growth is expected to be brisk in FY24 as a vigorous credit disbursal, and capital investment cycle is expected to unfold in India with the strengthening of the balance sheets of the corporate and banking sectors.
- While on the one hand, capital expenditure strengthens aggregate demand and crowds-in private spending in times of risk aversion; it also enhances the longer-term supply-side productive capacity
Capital expenditures
- Capital expenditures are the ones that create some liability/asset for the government. These include loans to public enterprises, loans to States, Union Territories and foreign governments and acquisition of valuables.
- They are long-term investments of huge amount of money for acquiring long-term assets like manufacturing equipment. Such assets acquired provide income-generating value over a period of years.
- Hence, the cost of such assets is recovered through year-by-year depreciation over the productive life of the asset. In essence, the expenditure which is done for initiating current, as well as the future economic benefit, is actually capital expenditure.
- Capital expenditure includes money spent on the following:
- Acquiring fixed and intangible assets
- Upgrading an existing asset
- Repairing an existing asset
- Repayment of loan
Significance of capital expenditure:
- Multiplier effect– Capex has the maximum multiplier effect (change in rupee value of output with respect to a change in rupee value of expenditure). This multiplier effect works through expansion of ancillary industries and services and job creation.
- Labour productivity– On the supply side, Capex can facilitate labour productivity.
- Macroeconomic stabilizer– Capital expenditure is an effective tool for countercyclical fiscal policy and acts as a macroeconomic stabiliser.
- Revenue generation– Capital expenditure leads to the creation of assets are long-term in nature and allow the economy to generate revenue for many years and boost operational efficiency.
- Liability reduction– Along with the creation of assets, repayment of loan is also capital expenditure as it reduces liability.
- Economic growth – Government capex catalyses private investment, increases production capacity thereby speeding up economic growth which in turn creates a lot more jobs.
- Crowding-in of investment: It is a phenomenon that occurs when higher government spending leads to an increase in economic growth and therefore encourages firms to invest due to the presence of more profitable investment opportunities. The crowding-in effect is observed when there is an increase in private investment due to increased public investment, for example, through the construction or improvement of physical infrastructures such as roads, highways, water and sanitation, ports, airports, railways, etc.