Capital expenditure
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Capital expenditure
Subject : Economy
Section : Fiscal Policy
Context : Continuing with the template of the last couple of years, the Budget is big on capital expenditure which is up by a whopping 37 per cent at ₹10lakh crore, accounting for 3.3 per cent of GDP
Concept –
- The central theme of the Budget 2022-23 was investment in infrastructure, and development.
- Sitharaman announced capital expenditure at ₹7.5-lakh crore. That’s about 2.9 per cent of GDP.
- Together with grant-in-aid to States, the effective capital expenditure for 2022-23 is projected to be about 4.1 per cent of GDP. The nominal GDP growth assumption of
What is Capital Expenditure-?
- Capital expenditure (Capex) is the money spent by the government on the development of machinery, equipment, building, health facilities, education, etc.
- Capital expenditure includes money spent on the following:
- Acquiring fixed and intangible assets
- Upgrading an existing asset
- Repairing an existing asset
- Repayment of loan
| Capital Expenditure | Revenue Expenditure |
| Capital expenditure is the expenditure by the government for the development of fixed assets. | Revenue Expenditure is the expenditure by the government which does not impact its assets or liabilities. |
| Along with the creation of assets, it also includes repayment of loan. | It includes salaries, interest payments, pension, and administrative expenses. |
| If an item has a useful life of more than one year, it is be capitalized (i.e., can be considered CapEx). | If an item has a useful life of less than one year, it shouldn’t be capitalized (i.e., cannot be considered CapEx). |
| Capital expenditure is a payment for goods or services recorded – or capitalized – on the balance sheet | Revenue Expenditure must be expensed on the income statement instead on the balance sheet. |
What is the 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.
What is the status of Government spending on capital expenditure?
- The outlay for capital expenditure in the Union Budget is being stepped up sharply by 35.4 per cent from Rs 5.54 lakh crore in the current year to Rs 7.50 lakh crore in 2022-23.
- The States cumulatively spend more on capex than the Centre.
- But, the money spent by states is not uniform throughout the year but is bunched up and spent in the last quarter of the fiscal.
- Both the Centre and the States should also focus on the quality of capex.
It is necessary if India has to escape its current moderate pace of economic expansion and post strong double digit GDP growth in a sustained manner in the future.