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 expansion: CapEx 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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