Capital expenditure

Capital expenditure

Subject :Economy

Section :Fiscal Policy

The Centre has raised the capital expenditure target by 35.4% on year to Rs 7.5 trillion for FY23 to continue the public investment-led economic recovery of the pandemic-battered economy. The capex last year was Rs 5.5 trillion.

Details:

To keep the momentum of government spending, the finance ministry has allowed all ministries to utilize the unspent portion of the funds released to them in a quarter in the subsequent quarter.

• The flexibility can be availed by the ministries and departments in the first quarter of a financial year after intimating the budget division of the finance ministry. 
• The unspent balances from the second and third quarters can be utilised in the third and fourth quarters respectively only with “formal and prior approval of the expenditure secretary.

Concept:

Capital expenditure (CAPEX) is defined by the Union government as money spent on the acquisition of assets such as land, buildings, machinery, and equipment, as well as stock investments.

What are the examples of Capital Expenditure?

• Capital expenditure is the part of the government spending that goes into the creation of assets like schools, colleges, hospitals, roads, bridges, dams, railway lines, airports, and seaports.
• Capital expenditure also covers the acquisition of equipment and machinery by the government, including those for defense purposes.
• Capital expenditure also includes investment by the government that yields profits or dividends in the future.

Benefits 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 the expansion of ancillary industries and services and job creation.According to the National Institute of Public Finance and Policy, every rupee spent as a revenue expenditure has a multiplier effect of Rs 0.98 while Capex delivers a multiplier effect of Rs 2.25 in the year it is incurred and Rs 4.80 during the course of the entire expenditure.

• Labour productivity – On the supply side, Capex can facilitate labor productivity.
• Macroeconomic stabilizer – Capital expenditure is an effective tool for countercyclical fiscal policy and acts as a macroeconomic stabilizer
• Revenue generation – Capital expenditure leads to the creation of assets that are long-term in nature and allow the economy to generate revenue for many years and boosts operational efficiency.
• Liability reduction – Along with the creation of assets, repayment of loans is also capital expenditure as it reduces liability.
• Economic growth – Government CAPEX catalyzes private investment, increases production capacity thereby speeding up economic growth which in turn creates a lot more jobs.

Crowd in private investment- by making available inputs and social overhead capital.