[Answered] Do you agree that Capex spending provides a big boost to investment activity and supports economic growth? Give reasons in support of your answer.

Capex (Capital Expenditure) refers to the money spent by the government that leads to creation of assets that are long-term in nature and yield benefits for years in the future. Expenditure on acquiring land, development of machinery, building, health facilities, schools etc. are examples of Capex. Capital Expenditure includes  

  • Acquiring fixed and intangible assets. 
  • Upgrading and repairing an existing asset. 
  • Repayment of loans. 

Significance of Capex in boosting investment and economic growth  

  • It creates a multiplier effect, where every rupee spent creates output worth 2-5 rupees. (National Institute of public finance and policy). 
  • It boosts infrastructure facilities that increase the efficiency of the economy. 
  • It leads to the creation of Human Capital, when targeted towards the creation of schools, training institutes, hospitals etc. 
  • Capex in infrastructure or social sector ensure a more participative and inclusive economy, which increases labour force participation and production in the economy. 
  • Capex for repayment of loans, reduces liability and increases investor confidence. 
  • Capex by government creates conducive environment which leads to crowding in of private investment. 
  • Capex by government, can put money in the hands of people which leads to demand creation and starts a virtuos cycle of growth in the economy. 

Capex becomes especially important in economies that are on the path of recovery, which is highlighted by the fact that Union government in the budget 2022, has announced a sharp increase of 35.4% in capital expenditure to Rs 7.5 lakh crore, for faster growth of economy post the pandemic induced slowdown. 

However, Capital expenditure comes with its own caveats and risks. 

  • Capex for covering the losses incurred by public enterprises does not result in benefits for the economy. 
  • Capex that ignores critical areas like health, education etc. has limited positive effects. 
  • Spending money in capex while sustaining high fiscal deficit has risks increasing inflation, current account deficit and risks of financial stability. which could negatively affect investor confidence. 
  • For Capex to be effective it has to be supplemented with a conducive regulatory regime. 
  • Capex has to be implemented effectively at all levels (central, state and local) to ensure a positive outcome. 

Capex is an important tool used by the government to stimulate growth and attract investment. However, money spent on Capex must be well distributed and supported by other policy measures to achieve the desired results. 

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