Context: The Department of Expenditure under the Finance Ministry has approved capital investment proposals of Rs 56,415 crore for 16 states in the current financial year 2023-24 (FY 23-24).

• The approval has been given under the scheme titled ‘Special Assistance to States for Capital Investment 2023-24’.

What is Capital Expenditure/Capex?

Capital expenditure includes money spent by the government on the following:

• Development of physical assets like machinery, equipment, building, health facilities, education, etc.

• Acquiring fixed (land) and intangible assets

• Upgrading an existing asset

• Repairing an existing asset

• Repayment of loan

The Budget estimate of the government's capital expenditure for the year 2020-21 was Rs 1,084,748 crore.

• Capex of government has been considered to be the prime driver of capex in the economy in the last few years.

• This is because the private sector has not been in a position to invest due to lower demand and high inflation.

Why is Capital Expenditure Important?

• Capital expenditure, which leads to the creation of assets, is long-term in nature and allows the economy to generate revenue for many years by adding or improving production facilities and boosting operational efficiency.

• Acquiring fixed assets gives profits or dividends in future, repayment of loan reduces liability.

• It also increases labour participation, takes stock of the economy and raises its capacity to produce more in future.

• Unlike capital expenditure, revenue expenditure (salaries of employees, interest payment on past debt, subsidies, pension, etc) is one that neither creates assets nor reduces any liability of the government. It is recurring in nature.

Cautions with the Capital Expenditure

• In the FY 2019-20, capital expenditure was 14.2% of Budget Estimates.

• The government had to cut public spending sharply towards the end of the financial year in order that the deficit target could be met.

• The Scheme ‘Special Assistance to States for Capital Investment 2023-24':

• In view of a higher multiplier effect of capital expenditure and in order to provide a boost to capital spending by States, the scheme was announced in the Union Budget 2023-24.

• The scheme for financial assistance to States for capital investment/expenditure, first instituted by the Ministry of Finance in 2020-21 in the wake of COVID-19 Pandemic.

• The flexibility and simplicity of the scheme design has earned praise from CMs and FMs of States in successive pre-budget consultations.

• A similar scheme was also executed by the Ministry of Finance in the last financial year.

• Under the scheme, special assistance is being provided to the State Governments in the form of 50-year interest free loan up to an overall sum of Rs. 1.3 lakh crore during the FY 2023-24.

Components of the Scheme

• Part-I being the largest with allocation of Rs. 1 lakh crore and has been allocated amongst States in proportion to their share of central taxes & duties as per the award of the 15th Finance Commission.

• For the Part–II, Rs. 3,000 crores have been set aside for providing incentives to States for scrapping of State Government vehicles and ambulances, etc.

• Part–III & IV of the scheme aim at providing incentives to States for reforms in Urban Planning and Urban Finance.

• Part-V of the scheme aims at increasing the housing stock for the police personnel and their families within the police stations in urban areas.

• The purpose under the Part-VI of the scheme is to promote national integration, Make in India and One District, One Product (ODOP) through construction of Unity Mall in each State.

• Part-VII of the Scheme provides financial assistance to States for setting up libraries with digital infrastructure at Panchayat and Ward level.

News Summary Regarding Capital Investment Proposals for States

• The continued push for capex by the Centre for states is significant given the fact that many states, led by Andhra Pradesh, Maharashtra, UP and Kerala, failed to meet the target in terms of actual capex.

• According to a Bank of Baroda report, out of 25 states as many as 14 states met less than 75% of the target in FY2023.

• The Centre had met its target both in terms of actual capex in various areas as well as the loans disbursed to states that were to be used for capex.

• In FY23, Centre’s capital expenditure exceeded the government’s revised estimate of Rs 7.28 lakh crore by Rs 8,551 crore.