Introduction

Over the past three decades, developing countries, including India, have been facing crucial challenges in their development paths. One notable concern is the widening gap between revenue and capital expenditure. This discrepancy arises from the exponential growth of revenue expenditure and the comparatively slower linear increase in capital expenditure. The latter plays a crucial role in the economy, since capital investments are well-justified, as they hold the potential to trigger a substantial multiplier effect on both economic growth and employment (Bose and Bhanumoorthy 2013). The primary goal of it is to bolster the economy's productive capabilities, thereby facilitating the optimal utilization of previously untapped labour and natural resources (RBI, 2023). Moreover, these strategic investments play a vital role in fostering efficiency and stimulating innovation across various sectors of the economy. By wisely channelling resources into projects that boost infrastructure and expand key sectors, governments can set the stage for sustainable economic development and overall progress. Against this back drop this study aims to analyse trends and patterns of India's capital formation and specifically focuses on the role of government capital expenditure in contributing to India's capital formation.

The analysis is divided into six sections. Section two examines the trends and patterns of India's capital expenditure over the years. Section three and four are focused on the role of capital expenditure in India's capital formation, specifically analysing its impact on the Union Budget 2023-24 and overall capital formation. The discussion concludes with presenting the findings derived from the analysis.

Trends and patterns of India's capital expenditure

The trends in allocation for capital expenditure over different budgets (Figure 1) shows that considering the past five years, allocation for capital expenditure has gone through a drastic shift. 2021-22 budget onward allocation for both capital expenditure and grants in aid for creation of capital assets for states also witness a major hike, in 2018-19 the effective capital expenditure was 5 lakh crore which increased by 174 percentage that is 13.7 lakh crore in 2023-24 budget.

Figure 1: Trends in effective capital expenditure

Source: -Various Union Budget documents

India's capital expenditure: A pivotal force for capital formation

As an emerging economy, India places significant emphasis on capital formation to drive sustainable economic growth and development. Figure-2 illustrates that India's gross capital formation has exhibited fluctuations over the years, reflecting the nation's economic cycles and the impact of policy interventions. According to the World Development Indicator Database, India's capital investment to GDP ratio stood at 31.2% in 2022, which is notably higher than that of other BRICS countries.

Fiqure-2: India, Gross capital formation (% of GDP)

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