CapEx - Right Way Forward
Can money really solve everything? Let us consider this query in the context of India.
In recent years, capital expenditure has been a major focus of GoI, especially during the pandemic. With the present economy being ambiguous and unpredictable, CapEx is necessary to ensure that businesses have enough resources to sustain themselves. Besides, investing in new systems and techniques can help organisations become more efficient and competitive over time.
In this week’s article, we at Xavier’s Finance Community delve deep into how CapEx can bring about the glorious summer of the Indian economy from the persisting unpredictability, and try to seek what the union budget 2023-2024 may hold for India’s economy.
To understand the whole scenario, we first need to understand:
What is CapEx?
Capital expenditure is the money spent on acquiring or improving long-term assets such as buildings, equipment, and machinery. It forms an integral part of both the private and public sectors. The most common form of CapEx is capital goods investment by a company when it replaces its old technology with newer technology.
Well, how did CapEx in India react to the global instability?
The global instability in 2020 caused a significant decrease in economic activity and investment due to disrupted supply chains, reduced consumer demand, and an overall decline in the global economy.
The Indian government was forced to step in with multiple stimulus packages and other measures to try to shore up the economy. However, these measures have had limited success due to the continued uncertainty surrounding the global economy.
Despite the global economic slowdown, India perpetually created an environment conducive to domestic consumption and demand.
The dependence on Russia and Ukraine for oil and gas, nickel, palladium, titanium and neon naturally created supply constraints. Global supply shocks brought on by the Russia-Ukraine conflict intensified the challenges of CapEx planning in the oil and gas sector.
Investments are anticipated to increase in metal mining and in renewable energy sources in India. As buyers try to find alternative sources of supply, capital expenditure in other regions and sectors is, as well, predicted to expand.
How are CapEx and Economic growth correlated?
In India, CapEx has been steadily increasing from 2022-23, and this trend is expected to continue in the coming years. This increase in CapEx can be attributed to various factors such as increased investment in infrastructure, technological advancements, and government initiatives. As a result, India’s economic growth will likely be positively impacted.
In India, the correlation between Capex and economic growth displayed a positive trend in 2023-2024. This was due to Prime Minister Narendra Modi’s “Make in India” campaign. Additionally, The Emergency Credit Line Guarantee Scheme (ECLGS) was unveiled as a part of the Rs 20 lakh crore comprehensive package announced by the Finance Ministry in 2020, to aid the Micro, Small and Medium Enterprises (MSMEs) sector in view of the economic distress caused by the COVID-19 pandemic.
Correspondingly to these efforts, there is expected to be an increase in the government’s revenue and economic growth.
What can be the opportunities arising in business sectors through CapEx?
GoI incurs a huge amount of money on CapEx which is essential for the growth and development of the economy, every year.
Exports – India’s manufacturing exports reached an unprecedented $418 billion in FY 2021-22, with overall year-on-year growth of more than 40% compared to the $290 billion from the previous year. With the increased YoY CapEx, India is expected to scale its manufacturing exports to $1 trillion by FY28. Much of this growth is anticipated to come from the Chemical, Pharma, Industrial Machinery, Electrical & electronics, Automotive, and Textile & apparel sectors.
Transportation– Specifically, capital expenditures in transportation are all expenditures that increase the capacity and efficiency of transport infrastructure, whether by reducing travel times, improving accessibility, generating more passengers and cargo, reducing costs, or reducing negative impacts on safety and the environment. The Railway and Road ministries combined accounted for Rs 3.24 lakh crore of the Rs 7.50 lakh crore CapEx budgeted for 2022-23. Of Rs 85,279 crore utilised by the Railways in April-August of 2022, 79% was capital spending, while for the Road Transport and Highways ministry, 95% of Rs 1.15 lakh crore total spending in the first five months was capital expenditure.
Fig 1: This Chart Shows the Government’s Capex spending distribution in PSU Banks for their development
How will the rural economy be affected by Capex?
The rural economy continues to grow at a slow pace, but even now it still needs continued investment and government support.
India’s rural population (% of the total population) was reported to be 64.61% in 2021, according to the World Bank’s collection of development indicators. Thus, one special area could be increasing allocations towards the rural employment scheme, MGNREGA. Other focus areas include further impetus to allied schemes such as crop insurance, rural road infrastructure, low-cost housing, power and utilities, etc.
- The targeted capital expenditure was increased to ₹7.5 lakh crore in FY23 (of which 31% is to be used for rural development).
This created new demand for services and manufactured inputs from MSMEs, set up in rural areas and helped farmers through better infrastructure.
Budget 2023 and what it brings in terms of CapEx?
The central government may decide not to increase FY24’s CapEx at the same rate as the previous two budget increases because it anticipates a strong recovery in private sector capital spending.
- The Federal Budget 2022 for this fiscal year (FY23) had allocated capital expenditures of Rs 7.5 trillion.
- This is 35.4% above the Budget Estimate (BE) for FY22 of Rs 5.54 trillion.
- It is anticipated to bring CapEx to around Rs 9.5 trillion in the coming FY24.
Leaders appear to have publicly laid the groundwork for a smoother expansion of capital spending.
- All FY24 CapEx spending will likely also include long-term, interest-free financing for government Capex commitments, as in FY23.
- The amount this year is 1 trillion rupees and may be withheld again in FY24.
CapEx Trend
The rapid recovery from the COVID-19 recession has been underpinned by public investment, leading to a recovery in investment in FY22. The world is looking at India for its next order, and local companies are ramping up production and investment to meet global supply.
- In the budget for FY23, the government increased its budget from 2022 to 2023 by 35.4% to 750 million rupees from the previous 554 million rupees.
- This is well above 12.7% from FY21, but the capital spending share of total spending is still growing very slowly, reaching 12.2% in FY12.
- Capital investment as a percentage of GDP fell from 1.82% in FY2012 to 1.65% in FY2020.
- This rose to 2.22% in FY21 and 2.39% in FY22.
Conclusion
CapEx, or capital expenditure, is an important factor in the economic engine. It is a measure of how much money businesses are investing in new equipment and facilities. This investment can be used to create jobs and spur economic growth.
The increased capital expenditure leads to increased economic growth by providing more opportunities for new jobs. In particular, firms should invest in infrastructure which will lead to better efficiency, productivity and higher earnings.
Companies must ensure that they invest in projects that will yield long-term returns and not just short-term gains.
The right policies can make CapEx a powerful tool which will undeniably play a crucial role in shaping India’s journey to 5 trillion dollars and beyond.
Curated By: Aditya Vikram Mukherjee and Heet Singhi
(Aditya Vikram Mukherjee is a 1st year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)
(Heet Singhi is a 1st year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)