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Editorial of the Day (1st Feb): A Case of Capex

Context: The central government’s budgeted capex for FY25 is set to reach a record ₹11.11 trillion, equivalent to 3.4% of GDP.

Key Data and Information from India’s FY25 Interim Budget

  • Investment Ratio Increase: India’s investment ratio improved to 29.8% of GDP in FY 2023-24, up from 27.3% in FY 2020-21, making India the fourth best in the G-20 in terms of investment ratio improvement post-COVID-19.
  • Public Capital Expenditure (Capex): The central government’s budgeted capex for FY25 is set to reach a record ₹11.11 trillion, equivalent to 3.4% of GDP—the highest in two decades.
    • This capex represents 23.3% of total expenditure, the highest in 32 years.
  • Economic Services Focus: Nearly two-thirds of the FY25 capex is allocated to economic services, with hard infrastructure sectors like roads and railways receiving about 46% of this portion.
    • Under the PM Gati Shakti programme, three major economic rail corridors have been identified to enhance logistics efficiency.
  • Defence Capex: A record allocation of ₹1.72 trillion is earmarked for defence in FY25, maintaining the ratio of defence capex to GDP at 0.5%.
    • This includes a new scheme to strengthen deep-tech technologies for defence and support ‘Atmanirbhar Bharat’ (self-reliant India).
  • Loans and Advances: The budget for loans and advances is set to increase to ₹1.71 trillion in FY25, indicating a 20% annual growth.
    • This aims to support states in their capex for regional infrastructure development, with states contributing approximately 44% to the general government capex as of December 2023.

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Benefits of Increased Capex

  • Multiplier effect: Capital expenditure exhibits the highest multiplier effect, driving a significant change in the value of output concerning the expenditure invested.
  • Promoting economic growth: It is crucial for driving economic growth by stimulating demand for goods and services, encouraging private sector investment, and enhancing employment opportunities. Investment in infrastructure establishes a foundation for business expansion and prosperity.
  • Improving public services: It is essential for constructing and upgrading public facilities like hospitals, schools, and water supply systems, ensuring citizens’ well-being and fostering social and economic development.
  • Infrastructure development: Key for advancing trade, commerce, and competitiveness, government investment in infrastructure creates economic opportunities, supports existing industries, and attracts foreign investment.
  • Creating employment opportunities: Capital expenditure generates short-term employment through infrastructure project construction and long-term opportunities by fostering economic growth and encouraging private sector investment.
  • Attracting private sector investment: Emphasizing capital expenditure helps attract private sector investment by providing essential infrastructure and fostering a favourable business environment.

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