Government Capital Expenditure (CAPEX) and its Significance in the Budget

Government Capital Expenditure (CAPEX) and its Significance in the Budget

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Government capital expenditure (Capex) is the outlay of government funds that comes in the form of development spending or investments and finally helps in creating assets for the long term. Significant Capex investments by the government help in generating healthy demand, sustain economic growth and attract private investments for longer periods. Through the creation of long-term assets, an economy is benefitted as better revenues are generated for many years. Capital expenditure by the government also enhances labour participation within a country thereby producing more scope for employment opportunities.

Studies have highlighted that a rupee spent on capital expenditure has an impact multiplier effect as high as 2.45 whereas the same effect for revenue expenditure stands at 0.99. Research suggests that the cumulative multiplier can be as high as 4.80. Here, the cumulative multiplier for a forecast period determines the cumulative change that takes place within an economic activity for each unit of incremental government spending. Thus, the capital expenditure definition captures the essence of this long-term spending and as more governments understand its benefits, infrastructure and capacity building have become an integral part of most economies.

Therefore, much emphasis is laid on capital expenditure in the budget and both the center and the states have a role to play in it. Looking at the last five year’s union budget statements, it can be seen that there is an increase of up to 20 percent in each budget from the preceding one. This shows the seriousness and commitment of the government towards asset building and creating long-term infrastructure for the economy. The different states also have enough roles to play as they carry greater responsibility for capital formation on them. However, there is a concentration of Capex with the larger states contributing more than their smaller counterparts due to their larger volume.

The capital expenditure heads for the government include the creation of assets like roads, highways, railways, seaports, airports, schools, colleges, dams, hospitals, stadiums, etc. It is a type of Non-plan expenditure and it also includes loans to states, union territories, public sector undertakings and foreign governments. Defence spending also comes under it so that all acquisition and procurement of machinery, weapons and equipment for the army, navy and air force comes under capital expenditure. However, defence spending does not result in infrastructure creation which can facilitate economic growth.