While presenting the Budget 2022-23, the Finance minister of India said that the economy is coming out of the grip of Corona. However, private investment is not as scaling up as was expected. So, applying classical Keynesian economics, to accelerate the demand, the government has increased the capital expenditure drastically. The capital expenditure target for the financial year 2022-23 has been kept at Rs 7.5 lakh crore. For the financial year 2021-22, this amount was Rs 5.5 lakh crore. A significant increase of 35.4 percent is being seen in the capital expenditure. Economic experts were expecting a similar fiscal stimulus from the government.
It is believed that in the financial year 2022-23, the effective capital expenditure will be Rs 10.68 lakh crore, which is 4.1 percent of GDP. This is more than double as compared to the financial year 2019-20. Against this backdrop, it is important to understand the meaning of capital expenditure or Capex and its significance in the growth of the economy.
What is CapEx?
In general accounting definition, capital expenditure is an expense incurred on asset generation, that bears fruits for a longer period of time.
If we see Capital expenditure in the context of government, it is the money spent by the government on the development of machinery, equipment, buildings, health facilities, education etc. Capital expenditure is a non-recurring type of expenditure in the form of capital investment.
This type of expenditure is expected to improve the productive capacity of the economy. Capital expenditure includes the following items – investment, loan repayment, loan disbursement, purchase of shares, expenditure on land, building, machines and equipment etc.
Capital expenditures that promote the creation of assets are long-term in nature, apart from improving facilities for production and increasing operational efficiency, giving it the potential to generate revenue for many years. Besides, it also increases labour participation, balances the economy and provides the ability to produce more in the future.
Why is it so crucial at this juncture?
India is facing the highest unemployment in four decades. The pandemic in the past two years has exacerbated this problem. According to reports of Oxfam Indian and think tank PRICE, income inequality in India has increased by leaps and bounds.
In this situation, the economy is heading towards a recessionary spiral. To negate this effort, an investment in job creation and personal consumption is very important.
Due to falling employment levels, private consumption, which is an engine of economic growth, is touching the ground. Moreover, the private companies also do not get any incentive to invest more in production due to low demand. These two factors together can lead India to a negative growth path.
To break this vicious cycle, high capital expenditure from the government can kick off a virtuous cycle. This increased CapEx will generate new infrastructure which requires more human workers and raw materials. In this way, high capex will incentivise companies to produce more raw materials like cement, steel and other required products.
To cope with increased demand, companies will further hire more people. This will help in creating more jobs, which ultimately increase the personal income of people. When people get more money in their hands, they will spend more. This will further boost production. In a long run, this will set India on a progressive inflationary growth trajectory.