Context: The Union Budget 2025 has allocated ₹10.18 lakh crore towards capital expenditure (capex) to promote infrastructure-driven growth. This marks an 8.4% decrease from last year's allocation of ₹11.1 lakh crore.
Relevance of the Topic: Prelims & Mains: Budget- State of Capital Expenditure
What is Capital Expenditure?
- The Union Budget defines capital expenditure (capex) as the funds allocated and utilised by the government to create assets or reduce liabilities that contribute to a country's economic growth.
- This includes long-term investments in infrastructure, machinery, healthcare, education, and other essential sectors.
- It covers expenses to acquire fixed assets, upgrade or repair existing assets, repaying loans, and other government investments that yield future profits or dividends.
- Repayment of loans is also treated as capital payment since it reduces financial liabilities.
Importance of Capital Expenditure:
- Determinant of Growth: Capital expenditure leads to the creation of long-term assets that generate revenue for many years, increases labour participation and boosts operational efficiency.
- Multiplier Effect: Government’s focus on productive capex has a higher multiplier effect on growth, especially when consumer spending shows weakness.
- Stimulate Consumption Demand: The present Indian economy goes through stagnant consumer spending and focused capital expenditure can help battle it.
Current State of India’s Capex:
- Government spending on Capex:
- The Centre's budget allocations for capex have more than doubled, from 1.6% of GDP in FY19 to a projected 3.4% in FY25.
- State capex is also expected to grow modestly to 2.6% of GDP in FY25, exceeding pre-pandemic levels.
- Increase in gross fixed capital formation (GFCF):
- Increased to 30.8% of GDP during FY24, surpassing the pre-pandemic average of 28.9%, observed during 2015-2019.
- State of FDIs and FPIs:
- Gross FDI inflows stand at $48.6 billion during April-October 2024, higher than $42.1 billion of last year. However, higher repatriation of profit has resulted in muted FDI inflows on a net basis.
- Recent outflow of FPIs has increased depreciation pressure on the rupee.
Challenges:
- Cautious spending amid economic challenges:
- Major central public sector enterprises reported a 10.8% decline in capital expenditure during H1FY25, reaching only 43.6% of their annual target.
- Under-utilisation by States: In the previous fiscal year, states used only Rs 1.1 trillion of the budgeted Rs 1.3 trillion.
- Underperforming private capex: The overall private sector capex has yet to witness a strong pickup, due to:
- global policy uncertainties
- geopolitical risks
- oversupply from China
- increased borrowing costs
- muted domestic demand.
Government’s Push:
- To bolster capex by states, the Centre has raised the allocation for the 50-year interest-free loans in the Union Budget for FY25 to Rs 1.5 trillion. Of this, Rs 550 billion is an unconditional loan, while the rest is tied to conditions such as industrial growth, land reforms, and state capex growth.