Capital expenditure

Indian Economy glossary

Also called: Capex · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Class 12, Ch 5 "Government Budget and the Economy"

Meaning

Capital expenditure (capex) is government spending that creates an asset or reduces a liability (a debt the government owes) for the Centre itself. The asset can be physical, such as land, buildings or machinery. It can also be financial, such as shares in a PSU or a loan that will be paid back. Repayment of loan principal also counts, because it cuts a debt.

It matters because capex builds the roads, railways and ports that help the economy grow over many years. Revenue spending is used up within the year. That is why the share of capex is used to judge the quality of government spending, not just its size.

Explanation

The test: asset or no asset for the Centre?

Art. 112 requires the government to place an Annual Financial Statement (the Budget) before Parliament. The Budget shows the revenue account and the capital account separately.
The one question to ask: does this spending create an asset, or reduce a debt, for the Centre itself?
If yes, it is capital expenditure.
If no, it is revenue expenditure.
Whose asset it is decides the answer, not whether an asset is built.
Say the Centre gives a grant to a state to build schools.
The school belongs to the state, not to the Centre.
So the money leaves the Centre's books and no asset comes back. This grant is revenue expenditure.
Now say the Centre gives the state a loan instead. The money will come back, so the loan is a financial asset. It is capital expenditure.

What capex includes

Capital outlay (spending on physical assets and equity):
land, buildings, machinery and equipment;
investment in shares, such as buying equity in a PSU.
Loans and advances to states, UTs, PSUs and others. A loan is a financial asset because the money comes back.
Repayment of loan principal, because it reduces a liability.
The interest on that same loan is revenue expenditure. Interest is only the cost of past borrowing.

Item	Revenue or capital?	Why
Buying equity in a PSU	Capital	Financial asset (shares)
Loan to a state	Capital	The money comes back
Repayment of loan principal	Capital	Reduces a liability
Grant to a state for building schools	Revenue	The asset belongs to the state
Interest paid	Revenue	Cost of past borrowing
Salaries, pensions, subsidies	Revenue	No asset is created

Effective capital expenditure: the wider measure

Formula: Effective capital expenditure = capital expenditure + grants-in-aid for creation of capital assets.
Why it exists:
Grants to states for roads, schools and hospitals are booked as revenue expenditure.
So ordinary capex misses these assets.
Effective capex adds them back, so it shows all spending on asset creation.
Worked example (illustrative numbers):
Say the Centre's capex is ₹12 lakh crore.
Say its grants to states for roads, schools and hospitals are ₹5 lakh crore.
Effective capex = 12 + 5 = ₹17 lakh crore.
In the accounts, the ₹5 lakh crore still sits under revenue expenditure. It is added back only in this wider measure.

What makes capex rise or fall

Why governments push capex up:
Roads, railways and ports cut transport costs for businesses.
Lower costs encourage private firms to invest more. This is called crowding-in (public investment pulling in private investment).
Capex has a higher multiplier than revenue spending. The multiplier is how much total output rises for each rupee spent, and for capex each rupee raises output by more than one rupee.
Why capex is often the first thing cut:
Committed expenditure (spending the government cannot easily cut in the short run, such as interest, salaries and pensions) takes about 65.3% of revenue receipts in 2026-27 BE [2].
These payments cannot be cut quickly.
So when money falls short during the year, capex is the easiest item to trim.
Example: 2025-26 capex was revised down from ₹11,21,090 crore (BE) to ₹10,95,755 crore (RE) [2].

In India

Legal basis: under Art. 112, the Budget must show the capital account separately from the revenue account.
Size in 2026-27 BE [2]:
Capital outlay: ₹9,43,042 crore (+6.3%).
Loans and advances: ₹2,78,780 crore (+33.8%).
Total capex: ₹12,21,821 crore, which is 11.5% more than 2025-26 RE.
Trend [2]:
2024-25 actual: ₹10,51,953 crore.
2025-26: ₹11,21,090 crore (BE), revised to ₹10,95,755 crore (RE).
2026-27 BE: ₹12.2 lakh crore.
Share of total spending (worked out from 2026-27 BE figures):
Total expenditure is ₹53,47,315 crore [2].
Capex share = 12,21,821 ÷ 53,47,315 ≈ 23%.
Revenue expenditure (₹41,25,494 crore) makes up the other ≈ 77%.
So only about one rupee in every four the Centre spends goes on capex.
Share of GDP:
Central capex rose from about 1.7% of GDP (2019-20) to about 3.1% (2025-26).
For 2026-27: 12.22 ÷ ~394 lakh crore ≈ 3.1% of GDP, worked out from [2] figures. NCERT Table 5.1 gives 3.2% of GDP.
Capex through states: the Centre has kept ₹1,85,000 crore as special loans to states for capital expenditure in 2026-27 [2]. These are loans, so they count as capex for the Centre.
Supporting measure: an Infrastructure Risk Guarantee Fund in 2026-27 to give private developers confidence [2].

Don't confuse with

Revenue expenditure: creates no asset for the Centre and is used up within the year (salaries, interest, subsidies). A grant to a state for building assets is still revenue expenditure. A loan to a state is capex.
Effective capital expenditure: capex plus grants-in-aid for creation of capital assets. It is a wider measure of asset creation. In the Budget accounts those grants still stay under revenue expenditure.
Capital outlay: only one part of capex (physical assets and equity, ₹9,43,042 crore in 2026-27 BE [2]). Capex = capital outlay + loans and advances.
Capital receipts: these are the money coming in on the capital account, such as borrowing and loan recoveries. Capex is money going out. Borrowing is a capital receipt, while repaying the principal of that borrowing is capex.

Prelims Hooks

Capex = capital outlay + loans and advances. In 2026-27 BE: ₹9.43 lakh crore + ₹2.79 lakh crore = ₹12.2 lakh crore, up 11.5% over 2025-26 RE [2].
Trap: a grant to a state for building schools is revenue expenditure for the Centre. A loan to a state is capital expenditure.
Trap: repayment of loan principal is capital expenditure. Interest on the same loan is revenue expenditure.
Buying equity in a PSU is capital expenditure, because shares are a financial asset.
Effective capital expenditure = capital expenditure + grants-in-aid for creation of capital assets.
In 2026-27, the Centre kept ₹1,85,000 crore as special loans to states for capital expenditure [2].

Mains Points

Quality of spending, not just size:
Central capex rose from about 1.7% of GDP (2019-20) to about 3.1% (2025-26). It is ₹12.2 lakh crore in 2026-27 BE [2].
Capex brings in private investment and has a higher multiplier, so it supports long-run growth.
But committed expenditure takes about 65.3% of revenue receipts [2]. This leaves little room, and capex is often the first item cut. The 2025-26 BE-to-RE cut is an example [2].
The capital/revenue label can mislead:
Grants to states for schools and health centres, and the salaries of teachers and doctors, are counted as "revenue" spending.
Yet they build human capital, meaning the skills and health of people.
Judging spending only by capex, or cutting only revenue expenditure, can squeeze health and education. Effective capex is a fairer measure of asset creation.
Fiscal federalism (GS-II):
The Centre now pushes capex through ₹1.85 lakh crore of capex loans to states [2].
Finance Commission grants fell 15% in 2026-27 [2].
This raises a debate. Tied transfers must be spent on purposes the Centre chooses. Untied transfers can be spent as states decide. The question is how much freedom states should have to set their own priorities.

Related concepts

Budget expenditure: revenue vs capital, committed spending and why spending grows

Sources

1Class 12, Ch 5 "Government Budget and the Economy" (primary)
2PRS Legislative Research, Union Budget 2026-27 Analysis (1 February 2026)prsindia.org · tier 1