From UPSC perspective, the following things are important :
Prelims level : Capital Expenditure
Mains level : Significance of Capex
A sharp 61.2% sequential rise in capital expenditure (capex) by the Central and State governments lifted fresh investment plans announced in the third quarter (Q3) of 2022-23 to ₹7.1 lakh crore, even though private sector investments dropped 41% from ₹6.31 lakh crore in Q2 to ₹3.71 lakh crore.
What is Capital Expenditure (CAPEX)?
- Capital expenditure refers to investments in upgrading existing or building new physical assets by the government or private businesses.
- As businesses expand, capex has a multiplier effect on the economy, creating demand and unleashing animal spirits.
Types of CAPEX
Many different types of assets can attribute long-term value to a company. Therefore, there are generalized types of purchases that may be considered CAPEX.
- Buildings may be used for office space, manufacturing of goods, storage of inventory, or other purposes.
- Land may be used for further development. Accounting treatment may different for land specifically held as a speculative long-term investment.
- Equipment and machinery may be used to manufacture goods and convert raw materials into final products for sale.
- Computers or servers may be used to support the operational aspects of a company including the logistics, reporting, and communication of operations. Software may also be treated as CapEx in certain circumstances.
- Vehicles may be used to transport goods, pick up clients, or used by staff for business purposes.
- Patents may hold long-term value should the right to own an idea come to fruition through product development.
Why need CAPEX?
- Asset creation: Capex is generally made to acquire fixed assets with a useful life of more than one accounting period.
- Infra upgrade: It may sometimes add value to an asset by incurring upgrading and maintenance expenditures, thereby increasing the shell life of an investment.
- Business sustainability: CAPEX increases the profit earning capacity of the business in the long term.
India’s Capital spending
- India’s budgets have seen an increase in allocations for the infrastructure segment, essentially roads and railways.
- In the last Budget, FM announced a big jump in the government’s planned capex.
- In 2022-23, the government will have a capex spend of ₹7.5 lakh crore (even more if we add grants-in-aid for capital assets including MGNREGA) — a spike of 27% over the estimates for the previous year (2021-22).
- Also, the government has ambitious plans to exponentially ramp up spending on expressways, logistics parks, metro systems and housing — much of this work will be sourced out to private contractors.
Challenges of Capital Expenditure
The following are the challenges faced due to CAPEX –
- Substantial funds: Normally, huge funds are required for processing a capital expenditure, and the availability of funds may be an issue. Therefore, organizations must wisely make capex decisions.
- Long term burden on exchequer: The amount of Capex is charged as an expense in more than one accounting period.
- Irreversible: Once a CAPEX is incurred, the decision cannot be changed easily. Reversing the capex decision may prove to be significantly costlier for any entity.
- Uncertainty: It becomes difficult to foresight expenses that may occur in the future. CAPEX involves huge costs and results that may be extended to the future. Hence, characterizing the exact decision regarding CAPEX is uncertain, which affects future expenses.
- Measurement Issue: The cost and benefits of CAPEX are challenging to identify and measure
- Temporal Spread: Decisions made regarding CAPEX are consistent over a long time, and investments it includes are called long-term investments. These long-term investments create problems in getting the exact discount rates and maintaining their equivalence in the coming period.
Why India focuses on CAPEX?
- Demand push: A thrust on capex eases supply-chain bottlenecks and revives demand.
- Job creation: So, while capex adds to the productive capacities of the economy, boosting long-term growth, it also spurs job creation and consumption.
- Timely implementation: Emphasis must also be provided on timely implementation of projects within the earmarked outlay by strengthening monitoring, redressal mechanisms and processes for controlling project delays.
- Project management: The solution lies in optimising project management processes of all the key stakeholders, including implementation agencies, state governments, vendors and others.
- Ensuring quality control: This would also help in ensuring quality control, which, in turn, will result in capital assets providing benefits over a longer term following the multiplier effect.
- Revenue saving: The government should also aim to cut down on inefficient revenue expenditure and focus on creating a balanced and stable virtuous cycle, which can have positive knock-on effects over the long term.
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