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Capital expenditure UPSC NOTE

 What is Capital expenditure

  • Capital expenditure, often abbreviated as CapEx, refers to the money a company spends on acquiring or upgrading long-term physical assets that are used in its operations. 

  • These assets are not easily consumed or converted into cash within a year.

  • These assets are expected to provide benefits for the company over several years.

 Key points about CapEx:

  • Property: Land, buildings, factories, offices, etc.

  • Plantandequipment: Machinery, vehicles, tools, computers, etc.

  • Intangible assets: Software, patents, licenses, etc.

  • Major repairs or upgrades: Extending the useful life of existing assets.

What it doesn't include:

  • Operating expenses: Day-to-day expenses like rent, salaries, utilities, etc.

  • Inventory: Goods that are held for sale in the short term.

  • Short-term repairs and maintenance.

Why it's important:

  • Growth and expansionCapEx allows companies to invest in new assets that can help them grow their business and increase their productivity.

  • Efficiency and innovation: By investing in new technology and equipment, companies can

improve their efficiency and reduce costs.

  • Maintenance and upkeep: CapEx is also needed to maintain and repair existing assets to ensure they continue to function properly.

India's economic recovery after the COVID-19 pandemic

  • India’s economic recovery in the early post COVID-19 pandemic phase was distinctly underscored by a strong performance in exports and domestic investments. 

  • While exports benefitted from an easing of global supply chains and a structural pick-up in services exports, domestic investments are a manifestation of the government’s relentless capex push.

  • As such, India’s investment ratio is estimated by the National Statistical Office to have improved to 29.8% of GDP in the financial year 2023-24 from its recent low of 27.3% in 2020-21

  • With this, India stands out as the fourth best country (followed by Mexico, Italy, and South Africa) in the G-20 space with respect to an improvement seen in the investment ratio, three years after COVID-19.

  • The FY25 Interim Budget carries forward the ethos of public capex a notch higher, thereby bolstering the government’s commitment to high quality spending

  • The budgeted capex by the central government, an important metric for capacity creation in the economy.

  •  It is slated to touch a record high of ₹11.11 trillion in FY25. 

  • As a ratio to GDP, this would tantamount to 3.4% of GDP, the highest in the last two decades. 

  • As a share of total expenditure, this comes to 23.3%, the highest in 32 years

  • Out of the budgeted capex outlay of ₹11.11 trillion, nearly two-thirds is earmarked for economic services (the lion’s share of approximately 46% is accounted for by hard infrastructure sectors such as roads and railways. 

  • In case of the railways, the Finance Minister has announced the identification of three major economic rail corridors under the PM Gati Shakti programme.

  • This is  to improve logistics efficiency and reduce cost; energy, mineral and cement corridors; port connectivity corridors; high traffic density corridors, and 40,000 normal rail bogies will be upgraded to meet Vande Bharat standards.

  • Defence capex, a niche priority segment under the Atmanirbhar Bharat campaign, will see a record high allocation of ₹1.72 trillion (although it is budgeted to remain unchanged at 0.5% as a ratio to GDP between FY24 and FY25). 

  • This will be supplemented with the launch of a new scheme for strengthening deep-tech technologies for defence purposes and expediting ‘atmanirbharta’.

  • Loans and advances (form of capital transfers) is budgeted to jump to ₹1.71 trillion in FY25, implying a 20% annualised growth

  • This will enable States to continue marching in lock step on capex creation at the ground level.

  • After all, States play an equally important role in the creation of regional infrastructure — on an annualised trailing basis, States had a share of approximately 44% (as of December 23) in general government capex.

Postives and negatives

  • Notwithstanding the unambiguous policy focus on government capex, there seems to be a slowdown in capex spending by public sector enterprises (PSEs). 

  • The PSE capex budget for FY24 has been axed from ₹4.88 trillion in initial Budget estimates to ₹3.26 trillion in the revised estimates

  • This will result in PSE capex contracting by approximately 10% in FY24

  • Going forward, PSE capex is budgeted to increase modestly to ₹3.43 trillion in FY25.

  • Implying a growth of approximately 5%. 

  • As a ratio to GDP, PSE capex is slated to moderate to 1.0% in FY25, the lowest in recent history.

  • The high point of this Budget is fiscal consolidation

  • While subdued PSE capex takes away some sheen from the overall capex thrust by government agencies.

  • This is getting compensated by the better-than-expected pace of fiscal consolidation — the FY25 Interim Budget has pegged the fiscal deficit target at 5.1% of GDP, lower than the consensus expectation of 5.3%-5.4%.

  • With gross g-sec borrowing now slated to moderate to a three-year low of ₹14.13 trillion

  • The private sector would benefit from better availability of lendable resources, hopefully at a lower rate (the 10Y g-sec yield closed 8 bps lower at 7.06%, its lowest levels in six months). 

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Capital expenditure UPSC NOTE
Capital expenditure UPSC NOTE
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