For this article:

2 Feb 2026·Source: The Hindu
3 min
EconomyPolity & GovernanceNEWS

India's Effective Capital Expenditure Shows Upward Trend as Share of GDP

India's effective capital expenditure is steadily rising as a percentage of GDP, indicating increased investment.

India's Effective Capital Expenditure Shows Upward Trend as Share of GDP

Photo by Frugal Flyer

The graphic highlights that India's effective capital expenditure as a share of GDP has been on an upward trajectory. It shows a rise from 4.5% in FY20 (RE) to 4.9% in FY21 (BE), 5.9% in FY22 (BE), 6.2% in FY23 (BE), 6.5% in FY24 (BE), and is projected to reach 6.8% in FY25 (BE). This consistent increase signifies the government's commitment to boosting infrastructure and productive capacity, which is crucial for long-term economic growth and job creation. Effective capital expenditure includes direct capital expenditure by the government and grants to states for capital asset creation.

Key Facts

1.

Effective capital expenditure as % of GDP: FY20 (RE) - 4.5%

2.

FY21 (BE) - 4.9%

3.

FY22 (BE) - 5.9%

4.

FY23 (BE) - 6.2%

5.

FY24 (BE) - 6.5%

6.

FY25 (BE) - 6.8%

UPSC Exam Angles

1.

GS Paper 3: Indian Economy - Government Budgeting

2.

Connects to syllabus topics like infrastructure development, investment models, and fiscal policy

3.

Potential question types: Statement-based, analytical questions on the impact of capital expenditure

Visual Insights

More Information

Background

Capital expenditure, or capex, refers to funds used by a company to acquire or upgrade physical assets such as property, buildings, or equipment. These expenditures are made to improve the future performance of the organization. Government capex is crucial for economic growth, influencing the GDP and creating jobs. Historically, India's capital expenditure has varied based on economic conditions and government priorities. The emphasis on infrastructure development gained momentum in the post-liberalization era, with successive governments focusing on projects like highways, railways, and power plants. The planning commission played a key role in allocating resources for these projects through the five-year plans. Effective capital expenditure includes direct capital expenditure by the government and grants to states for capital asset creation. This is important because it directly impacts infrastructure development and productive capacity. The Finance Commission also plays a role in recommending grants to states, which can be used for capital asset creation. The FRBM Act influences the government's ability to undertake capital expenditure by setting targets for fiscal deficits.

Latest Developments

In recent years, the Indian government has significantly increased its focus on capital expenditure to boost economic growth. Initiatives like the National Infrastructure Pipeline (NIP) and PM Gati Shakti National Master Plan aim to improve infrastructure connectivity and reduce logistics costs. These initiatives are expected to drive economic activity and create employment opportunities. However, there are challenges in implementing these projects, including land acquisition issues, environmental clearances, and delays in project execution. The NITI Aayog plays a crucial role in monitoring the progress of these projects and identifying bottlenecks. States' participation is also vital for the success of these initiatives, as many infrastructure projects are implemented at the state level. Looking ahead, the government is expected to continue its focus on capital expenditure, particularly in sectors like renewable energy, transportation, and digital infrastructure. The goal is to achieve sustainable and inclusive economic growth. Increased capital expenditure is projected to have a multiplier effect on the economy, leading to higher investment and job creation.

Frequently Asked Questions

1. What is effective capital expenditure and why is it important for the Indian economy?

Effective capital expenditure includes direct capital expenditure by the government and grants given to states for creating capital assets. It is important because it boosts infrastructure and productive capacity, which is crucial for long-term economic growth and creating jobs.

2. What are the key facts about India's effective capital expenditure as a percentage of GDP for the UPSC Prelims exam?

As per the provided data, remember the upward trend of effective capital expenditure as a percentage of GDP: FY20 (RE) - 4.5%, FY21 (BE) - 4.9%, FY22 (BE) - 5.9%, FY23 (BE) - 6.2%, FY24 (BE) - 6.5%, and projected FY25 (BE) - 6.8%. Focus on the overall increasing trend rather than memorizing individual figures.

Exam Tip

Remember the trend: steady increase in effective capex as % of GDP.

3. Why has the Indian government been focusing on increasing capital expenditure in recent years?

The Indian government has increased its focus on capital expenditure to boost economic growth. Initiatives like the National Infrastructure Pipeline (NIP) and PM Gati Shakti National Master Plan aim to improve infrastructure connectivity and reduce logistics costs, which are expected to drive economic activity and create employment opportunities.

4. How does an increase in effective capital expenditure impact the common citizen?

Increased effective capital expenditure leads to better infrastructure (roads, railways, etc.), which improves connectivity and reduces transportation costs. This can lead to lower prices for goods and services. It also creates employment opportunities, leading to increased income and improved living standards for common citizens.

5. Explain the relationship between capital expenditure and GDP.

Capital expenditure is a component of GDP. When the government spends more on capital projects (infrastructure, etc.), it increases overall economic activity, contributing to GDP growth. Higher government capex can stimulate private investment, further boosting GDP.

6. What initiatives have been taken by the government to improve infrastructure connectivity?

The government has launched initiatives like the National Infrastructure Pipeline (NIP) and PM Gati Shakti National Master Plan to improve infrastructure connectivity. These initiatives aim to reduce logistics costs and promote economic activity.

Practice Questions (MCQs)

1. Consider the following statements regarding India's effective capital expenditure: 1. Effective capital expenditure includes direct capital expenditure by the government. 2. Effective capital expenditure includes grants to states for capital asset creation. 3. As a share of GDP, effective capital expenditure is projected to reach 7.5% in FY25 (BE). Which of the statements given above is/are correct?

  • A.1 and 2 only
  • B.2 and 3 only
  • C.1 and 3 only
  • D.1, 2 and 3
Show Answer

Answer: A

Statement 1 is CORRECT: The provided summary explicitly states that effective capital expenditure includes direct capital expenditure by the government. Statement 2 is CORRECT: The summary also mentions that effective capital expenditure includes grants to states for capital asset creation. Statement 3 is INCORRECT: The summary projects effective capital expenditure to reach 6.8% in FY25 (BE), not 7.5%.

2. Which of the following best describes 'effective capital expenditure' as used in the context of the Indian economy? A) Only direct capital expenditure by the central government. B) Direct capital expenditure by the central government and loans to state governments. C) Direct capital expenditure by the government and grants to states for capital asset creation. D) Total expenditure on infrastructure projects by both central and state governments.

  • A.Only direct capital expenditure by the central government.
  • B.Direct capital expenditure by the central government and loans to state governments.
  • C.Direct capital expenditure by the government and grants to states for capital asset creation.
  • D.Total expenditure on infrastructure projects by both central and state governments.
Show Answer

Answer: C

The correct answer is C because the summary explicitly defines 'effective capital expenditure' as including direct capital expenditure by the government and grants to states for capital asset creation. Options A, B, and D are incorrect as they do not fully encompass the definition provided in the source.

3. The recent upward trend in India's effective capital expenditure as a share of GDP is primarily aimed at: A) Reducing the fiscal deficit. B) Boosting infrastructure and productive capacity. C) Decreasing the current account deficit. D) Controlling inflation.

  • A.Reducing the fiscal deficit.
  • B.Boosting infrastructure and productive capacity.
  • C.Decreasing the current account deficit.
  • D.Controlling inflation.
Show Answer

Answer: B

The summary explicitly states that the consistent increase in effective capital expenditure signifies the government's commitment to boosting infrastructure and productive capacity, which is crucial for long-term economic growth and job creation. While capital expenditure can indirectly influence other economic factors, the primary aim is infrastructure and productivity.

Part of Story Threads

India's Economic Growth and Development - January 2026

Key economic developments in India during January 2026, including growth projections, export performance, infrastructure financing, and policy discussions.

GKSolverToday's News