“Economic growth entails production, consumption, and investment as posited by the closed economy Keynesian cross model”

Capex or capital investments are long-term investments, where companies and governments invest in machinery, production units, health facilities, education, infrastructure, and any other fixed assets, that will aid in improving production and operational efficiency alongside higher capacity facilitation. 

Capital investment leads to higher labor productivity, economies of scale, development of new products, and R & D. It also leads to the creation of assets that allows for long-term revenue generation within an economy. It is essential to note that the required basis for capex is solid financial and human capital fundamentals. Analysis by BEA has shown that business investment in capital goods leads to higher GDP. 

India is a consumption-led economy, and the resilience for this has to come from strong and sustained capital investments, both by the government and the private sector. Capex leads to a multiplier effect in the economy by 2.45 times as per the RBI, meaning for every 1 rupee invested, the output increases by 2.45x. 

Capex by the Centre

The government has placed immense importance on capex being a significant tool for a good macroeconomic tract,(Fig 1). Capital expenditure by the government increased by 63.4% in FY23 and was a significant driver of economic growth during this period. Economic Survey 2022-2023, premises that capital goods formation has led to a decline in the urban unemployment rate. The focus areas of capex spending by the government can be assessed by looking at the year-on-year growth of infrastructure, with Roads, at 67%, Railways at 103%, and defense at 41%. One of the major driving factors behind the post-pandemic economic revival has been public sector capex. The central government has been on a spur with public investment, to offset the downsides of a fall in investor confidence within corporations. Roadways, railways, and defense remain the significant recipients of union capex.

Source: India Budget Documents, Reuters; Compilation and Visualization By Arthashastra Intelligence.

Over the years, both the state and union capex has been increasing. Studies focusing on modeling unemployment as a function of public expenditure and other factors have consistently shown that public capex leads to job creation and economic growth through many routes, the key being the multiplier process. One such study was done for India, which strongly puts forward the same and identifies the main employment-generating sectors in India being Agri, Transport, Telecom, Energy production, Mining & manufacturing. The study calls for designing comprehensive incentive packages for employment generation within these sectors. 

The Indian labor market is exploding and expanding. With roughly 10 million workers being added to the labor market every year and increasing technological advances, addressing employment will be a core macroeconomic issue in the near times. 

Budget 2023’s capex outlay

The 2023 budget, raised the capex spend to 10 trillion or 10 lakh crore rupees for FY2023-FY24. This is a 33% increase as compared to previous years. The outlay has been seen as a major element for economic growth and resilience. A stronger multiplier effect and reduced friction in the goods and labor markets should lead to a successive propagation of the capex outlay to bring visible and sustainable growth impacts on the Indian economy. The increased outlay announcement has so far received positive responses. In the medium run, this should also illuminate private capex to increase, and increase investor confidence. Private capex will further generate more jobs in other core sectors, and in aggregate should lead to steady growth of output in the long run. However, the real effects of investments on the macroeconomy, depend on the multiplier, and focus should be placed on thoroughly understanding the propagative mechanisms of this process. 

Meanwhile,  the RBI continues to maintain the “withdrawal of accommodation”, a stance focusing on bringing inflation within the tolerance level, and the government supporting an expansive fiscal policy aimed at economic growth, job creation, and reviving consumer demand puts the Indian economy on a favorable and positive trajectory before the Lok Sabha elections next year.