What is the significance of capital expenditure?

 What is the significance of Capital Expenditure? 

• Multiplier effect - Capital Expenditure has the maximum multiplier effect (change in rupee value of output with respect to a change in rupee value of expenditure). 

• This multiplier effect works through expansion of ancillary industries and services and job creation. According to National Institute of Public Finance and Policy, every rupee spent as a revenue expenditure has a multiplier effect of  Rs 0.98 while Capital Expenditure delivers a multiplier effect of Rs 2.25 in the year it is incurred and  Rs 4.80 during the course of the entire expenditure. 

• Labour productivity - On the supply side, Capital Expenditure can facilitate labour productivity. 

• Macroeconomic stabiliser - Capital Expenditure is an effective tool for counter cyclical fiscal policy and acts as a macroeconomic stabiliser. 

• Revenue generation - Capital Expenditure leads to the creation of assets are long-term in nature and allow the economy to generate revenue for many years and boosts operational efficiency. 

• Liabilty reduction - Along with the creation of assets, repayment of loan is also Capital Expenditure as it reduces liability. 

• Economic growth - Government Capital Expenditure catalyses private investment, increases production capacity thereby speeding up economic growth which in turn creates a lot more jobs.