What is Capital Expenditure (CapEX): Meaning, Examples, Formula, Calculation

The Union Budget defines capital expenditure (CapEx) as the funds allocated and utilised by the government to develop assets that contribute to a country's economic growth. This includes investments in infrastructure, machinery, healthcare, education, and other essential sectors. Additionally, it covers expenses related to acquiring fixed assets, upgrading or repairing existing assets, repaying loans, and other government investments that yield future profits or dividends. 

Why is Capital Expenditure Important?

Capital expenditures represent long-term investments made toward creating assets that enhance production capabilities and operational efficiency and generate revenue over time. They also raise participation in employment opportunities, strengthen economies, and increase future production capacities. Repayment of loans is also treated as capital payment since it reduces financial liabilities. 

The capital expenditure in the union budget is categorised into estimated expenditure, revised expenditure, provisional expenditure and actual expenditure. Estimated expenditure is a budget plan for how the government will spend money on different departments to improve the economy, announced on February 1, every year. Revised expenditure stands for the change in the estimated expenditure, and provisional expenditure is the unaudited estimate of expenditure and receipt for that financial year. Listed below are the figures of expenditure estimates in the previous and current financial years. 

Types of Capital Expenditure

Capital expenditures in the Union Budget are categorised based on the nature of the investment and its long-term impact on the economy. The key types include:

Infrastructure Development

• Investment in roads, highways, and expressways (e.g., Bharatmala project).
• Expansion of railway networks, metro systems, and ports.
• Development of smart cities and urban infrastructure.

Defence & National Security

• Procurement of military equipment, warships, and fighter jets.
• Upgrading defence infrastructure, research, and self-reliance in military production (Atmanirbhar Bharat in Defence).

Energy & Power Sector

• Investments in renewable energy projects (solar, wind, hydro, nuclear).
• Expansion of power grids and electrification in rural areas.
• Modernisation of oil refineries, gas pipelines, and coal mining infrastructure.

Agriculture & Rural Development

• Development of irrigation systems, cold storage, and warehousing.
• Implementation of Digital Public Infrastructure (DPI) for Agriculture.
• Financial support for natural and organic farming initiatives.

Manufacturing & Industrial Growth

• Incentives for industries under Production Linked Incentive (PLI) schemes.
• Investment in industrial corridors and export hubs.
• Boosting MSMEs and Make in India initiatives.

Digital & Technological Advancement

• Expansion of internet facilities in rural areas.
• Investment in semiconductor manufacturing and 5G infrastructure.
• Strengthening cybersecurity and AI-driven initiatives.

Social Infrastructure (Health & Education)

• Construction of new AIIMS hospitals and medical colleges.
• Expansion of PM Awas Yojana (Urban & Rural) for affordable housing.
• Strengthening school & higher education institutions (e.g., Samagra Shiksha Abhiyan, Skill India Mission).

Strategic Investments & Loan Repayments

• Capital infusion into Public Sector Banks (PSBs) & financial institutions.
• Repayment of government loans and liabilities to reduce fiscal burden.
• Investment in state-run enterprises and sovereign wealth funds.

How to Calculate CapEx?

The Capital Expenditure can be calculated using the following formula:

CapEx = PP&E (current period) – PP&E (prior period) + Depreciation (current period)

where PP&E is the property, plant & equipment of the organisation. 

By analysing these expenditures, the government can assess its investment in nation-building, economic expansion, and future revenue-generating assets.

Capital Expenditure (CapEx) Examples

Example 1:

As part of its commitment to ‘Viksit Bharat,’ the government has prioritised enhancing productivity and resilience in agriculture, with a capital expenditure allocation of Rs 1.52 lakh crore for the sector in 2024-25. To strengthen agricultural output and climate adaptability, 109 high-yielding and climate-resilient varieties of 32 field and horticulture crops will be introduced for cultivation. 

In a bid to promote sustainable farming, one crore farmers will be transitioned to natural agriculture within the next two years, supported by certification and branding initiatives. Additionally, 10,000 need-based bio-input resource centres will be established to facilitate access to organic farming resources. The government also intends to implement Digital Public Infrastructure for Agriculture in three years, which includes comprehensive coverage of farmers and their respective lands to improve efficiency, productivity, and resilience in the agricultural sector. 

Example 2:

Prioritising the urban development sector under the ‘Vikasit Bharat’ scheme, the government has aimed to improve urban housing and street markets to drive sustainable urban growth. Transit-oriented development plans will be formulated and financed to enhance urban mobility and infrastructure for 14 large cities with populations exceeding 30 lakh. 

Addressing the housing needs of urban poor and middle-class families, the government has proposed an investment of Rs 10 lakh crore under PM Awas Yojana Urban 2.0 over the next five years, including Rs 2.2 lakh crore in central assistance, to provide housing for one crore families. Additionally, to promote local economies and small businesses, a new scheme will support the development of 100 weekly ‘haats’ or street food hubs each year for specific cities, enhancing urban vibrancy and economic inclusivity.

Difference Between CapEx and OpEx

Capital Expenditure (CapEx) and Operating Expenditure (OpEx) are two methods of spending, each serving a different fiscal purpose, thus influencing the economy in various ways. Therefore, CapEx is defined as a government's long-term investment or capital expenditure outlay in infrastructure, defence, energy, and other capital resources, from which returns are expected over time. 

Such investments help create or improve physical assets like roads, railways, renewable energy plants, and urban development projects. By boosting long-term growth, CapEx is significant in expanding the economy's capacity, increasing jobs, and generating future revenues. 

Operating Expenditure (OpEx) refers to the regular expenses required to maintain the regular functioning of the government. This includes costs like salaries, welfare programs, subsidies, and funding for healthcare and education. Unlike Capital Expenditure (CapEx), which is invested in long-term assets, OpEx is recorded as an expense in the period it occurs and appears on the income statement, affecting the fiscal deficit in the short term. 

While OpEx is crucial for maintaining public services and ensuring operational stability, it does not directly lead to asset creation or long-term economic growth. CapEx is viewed as a catalyst for future development in the Union Budget, while OpEx addresses immediate government responsibilities and services.

Capital expenditure plays a significant role in India’s long-term economic growth, fueling advancements in infrastructure, agriculture, and urban development. Many industry experts anticipate a 10-12% increase in capital expenditure in the upcoming Union Budget 2025, expected to benefit sectors such as road and railway infrastructure, defence, and employment. This rise in spending is seen as a way to counterbalance the decline in expenditure from the last financial year on account of election periods.