Capital Expenditure

Capital expenditure is the expenditure of the government that results in the creation of physical assets or a depletion in the financial abilities of the government. This includes expenditure incurred on buildings, land, equipment, machinery and loans and advances made by the central governments to the state governments. Capital expenditure forms a part of the government spending that is used in the creation of assets like schools, colleges, hospitals, roads, bridges etc. It also includes the acquisition of equipment and machinery by the government for defence purposes. It could also consist of investments that would yield profits or dividends in the future.

A high amount of capital expenditure would lead to rapid economic growth as the government invests more towards the creation of assets and the development of infrastructure. It reduces liabilities as well.

Capital expenditure which results in the creation of assets are as follows:-

a) Expenditure incurred on purchase of property, buildings, machinery, equipment and the like.

b) Investments made in shares. Loans given by the central banks to state governments, foreign governments.

c) Expenditure incurred for the acquisition of valuables.

This type of expenditure adds to the capital stock of the economy and increases the nation’s capacity to produce more in the future. Repayment of loans also forms a part of capital expenditure as it reduces the government’s liability.

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