Capital Expenditure

Introduction

• Capital expenditure is an expense that creates permanent assets and yields regular income for the government. 
• Capital expenditure is defined by the Union government as money spent on the acquisition of assets such as buildings, land, machinery, and equipment, as well as stock investments.

Examples of Capital Expenditure

• Loans given by the government to states, PSUs, financial institutions and external loans given to any foreign governments or foreign bodies. 
• Loan repayment of the past borrowing which consists of only the capital part of the loan repayment as the element of interest on loans are shown as a part of the revenue expenditure. 
• The portion of government payments that goes toward the construction of assets such as schools, colleges, hospitals, roads, bridges, dams, railway lines, airports, and seaports is known as capital expenditure.
• The acquisition of new weaponry and weapon systems, such as missiles, tanks, fighter planes, and submarines, necessitates a significant financial outlay.
• The defense sector receives over a third of the central government’s capital spending, primarily for armament acquisitions.

Significance of Capital Expenditure

• Capital expenditure helps in capital assets formation which provides future cash flows.
• Capital Expenditure serves as a macroeconomic stabilizer and is an excellent instrument for countercyclical fiscal policy. 
• It has a multiplier effect on the economy.
• It creates more jobs and improves labour productivity.