Effective capital expenditure
Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT
Meaning
Effective capital expenditure measures all central spending that creates assets, including assets built by others with central money.
Effective capital expenditure = Capital expenditure + Grants for creation of capital assets
We need this measure because grants the Centre gives to states are counted as revenue expenditure, even when the states use them to build roads or schools. Normal capital expenditure misses these assets. Effective capital expenditure adds them back.
Example
Say the Centre spends ₹100 crore buying machinery. It also gives a state a ₹40 crore grant to build school buildings. Capital expenditure is ₹100 crore, but effective capital expenditure is ₹140 crore.
Don't confuse with
- Effective revenue deficit: this is revenue deficit minus grants for creation of capital assets. It is a deficit measure. Effective capital expenditure is a spending measure.
- Loans to states: these are already capital expenditure. Only grants are added.
Related concepts
- Revenue expenditure
- Capital expenditure
- Plan and non-plan expenditure
- Committed expenditure
- Interest payments
- Social sector expenditure
- Welfare expenditure
- Wagner's law
- Peacock-Wiseman hypothesis