India aims for growth with increased capital expenditure
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Source: The post India aims for growth with increased capital expenditure has been created, based on the article “Government needs to spend – for India to grow” published in “ Indian Express” on 31st January 2025

India aims for growth with increased capital expenditure

UPSC Syllabus Topic: GS Paper3- Economy-  Government Budgeting.

Context: The article discusses India’s goal of a $5-trillion economy and the role of capital expenditure in growth. It highlights budget allocations, public and private investments, challenges like weak demand and elections, and the need for careful monitoring to ensure effective spending and economic stability.

For detailed information on Increased Capital Expenditure by Indian states in 2024 read this article here

Why is capital expenditure important?

  1. Boosts Economic Growth: Capital expenditure (capex) significantly impacts growth, particularly when consumer spending is low. It has a high multiplier effect, stimulating further economic activities.
  2. Increases GDP Contribution: Recent data shows India’s gross fixed capital formation (GFCF) rose to 30.8% of GDP in FY24 from a pre-pandemic average of 28.9%, indicating robust investment activities.
  3. Supports Infrastructure Development: The government has prioritized infrastructure, evident from increased allocations for interest-free loans to states, aiming to promote industrial growth and land reforms through strategic investments.
  4. Responds to Economic Slowdowns: Capex plays a critical role in countering economic slowdowns, evident from the strategic increase in budget allocations despite challenges like electoral disruptions and global uncertainties.

What are the recent trends in investment?

  1. Rise in Capital Expenditure (Capex): Government capex increased from 1.6% of GDP in FY19 to 3.4% in FY25. State capex also rose to 2.6% of GDP, exceeding pre-pandemic levels.
  2. State Capex Support: The government raised the 50-year interest-free loan allocation to Rs 1.5 trillion in FY25. Rs 550 billion is unconditional.
  3. Slowdown in Public Capex Due to Elections:
  • Central government capex declined by 15.4% year-on-year in H1FY25.
  • State government capex fell by 10.5%.
  • Public sector enterprises’ capex dropped by 10.8%, reaching only 43.6% of their annual target.
  1. FDI Trends: Gross FDI inflows increased to $48.6 billion in FY25 from $42.1 billion last year, but higher profit repatriation weakened net FDI.
  2. Infrastructure Sector Recovery: Road development orders rose by 20.5% in H1FY25, after a 15% decline in FY24.

What are the key challenges ahead?

  1. Weak private investment due to high costs and global risks.
  2. Depreciation pressure on the rupee due to FPI outflows.
  3. Slow utilization of state capex budgets. In FY24, states used only Rs 1.1 trillion out of the Rs 1.3 trillion budgeted.

Conclusion

The government has set ambitious capex targets. Spending slowed due to elections but is expected to pick up. Private investment remains weak, but policy support may improve it. Careful monitoring of capex is necessary for sustained economic growth.

Question for practice:

Examine the role of capital expenditure in driving India’s economic growth and the challenges associated with its effective utilization.


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