The Power of Capital Expenditure (CapEx): 🏗️ Transforming Nations, Empowering People 💪

Imagine driving on smooth, newly laid highways that connect bustling cities, or witnessing the rise of skyscrapers that reshape urban skylines. These are not just scenes from a futuristic movie but glimpses of the transformative power of capital expenditure (CapEx) in real life. As we delve into the world of CapEx and its profound impact on Aam Aadmi’s daily lives, let’s understand how investments in infrastructure and development shape the future of nations and the prosperity of their people.

Decoding the Foundation:

Before understanding CapEx, let’s explore another term, Gross Fixed Capital Formation or GFCF. The GFCF is used to measure the total value of investments made in fixed assets within an economy over a specific period, typically a year. It encompasses investments made by businesses, governments, and households in machinery, equipment, buildings, and infrastructure such as roads, bridges, railway tracks, and more. In simpler terms, it’s the fuel that drives economic growth and development.

Capital expenditure is the amount of money that is spent on GFCF. For instance, if the country had capital assets worth ₹100 on 1st Jan 2023 and during the year spent ₹20 towards CapEx, the capital assets of the country at the end of the year will be ₹120.   

The significance of  GFCF and CapEx? 

Investing in fixed capital formation is essential for fostering economic growth and development. Higher levels of GFCF typically indicate increased investment in productive capacity, which can lead to higher levels of economic output and growth over the long term. For example, building new roads can enhance connectivity and improve economic activity across cities and regions. 

India’s CapEx Landscape: Trends and Implications

Source: Refinitiv Eikon

As seen in the chart above, GFCF as a proportion of GDP touched a multi-year high of 35% in 1HFY24. This growth was driven by Govt CapEx which has continued to show a sharp upward trend. 

Source: https://www.indiabudget.gov.in/

It is important to note that this CapEx funding by the Govt has been accomplished without any increase in the fiscal deficit. Fiscal deficit, expressed as a percentage of Gross Domestic Product, represents the amount of money that the government needs to borrow to fund its expenditures when its total spending exceeds its total revenue.

A lower fiscal deficit percentage is generally considered more favorable, as it indicates a healthier fiscal position as the Govt is not overspending relative to its revenue. One way to fund the overspending is by borrowing money. High levels of debt can become unsustainable, requiring higher interest payments and potentially leaving no funds for other spending priorities. Another advantage of a low fiscal deficit is that it gives the Government more flexibility to respond to future economic challenges or crises. In times of economic downturn/crisis, like the Covid pandemic, governments may need to increase spending to stimulate the economy or provide subsidies to support the population. Having a lower deficit allows for this without risking a rapid escalation of debt levels. This can be seen in the chart below, during FY2021 fiscal deficit percentage jumped to 9.2% as the Govt spent a lot of money towards subsidies. 

The fiscal deficit hit a 10-year high of 9.2% during fiscal year (FY) 2021. Since then it has been constantly trending down and is at 5.8% as per revised estimates for FY2024. During her budget speech, the finance minister confirmed that the Govt will adhere to the path of fiscal consolidation and reduce it below 4.5% by FY2026. The fiscal deficit is estimated to be 5.1% of GDP in FY2025.

Source: https://www.indiabudget.gov.in/

So how has the Govt been funding this CapEx? 

• Of course, via tax collection. It needs to be noted that the tax collection trend has been robust. The total tax revenue of the Central Govt has more than doubled since FY2017 and is expected to reach ₹23.3 lakh crore in FY24. 
• At the same time subsidy as a percentage of tax revenue as well as GDP has been trending down.  

Source: https://www.indiabudget.gov.in/, Refinitiv Eikon

* GDP for FY2024 has been calculated on an annualized basis

Done correctly, Govt CapEx can stimulate overall economic activity, leading to increased demand for goods and services produced by private firms. 

Data from RBI shows that capacity utilization hit a multi-year high in the 4th quarter of 2023 and has stayed elevated since then. The average new order book has also been trending up since the previous 4 quarters. According to Antique Brokerage, industrial companies across sectors like railways, defense, capital goods, etc have been witnessing significant growth in order books. 

Source: RBI

High Govt CapEx has a “crowding in” effect wherein private players also invest to expand capacity, due to a favorable business environment. According to news reports, momentum for private capital investments remains strong. Private sector CapEx announcements stood at ₹6.2 lakh crore in the first half of FY24, as per Avendus, 40% higher than the last ten years average in the same period. 

Order books are expected to be robust with Govt capital outlay up by 11.11% for FY25 and additional support via the production-linked incentives scheme. With sentiment around India’s growth potential improving, financial markets are expected to continue to perform well.     

Looking Ahead: A Promising Future

As we wrap up our deep dive into CapEx and its implications, it’s clear that the gears of economic progress are turning at an unprecedented pace. With governments investing heavily in infrastructure and private sectors poised for exponential growth, the stage is set for a transformative journey ahead. This may also indicate that the markets may start to see an uptrend.

Until our financial paths cross again!

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