Finance minister Nirmala Sitharaman is all set to present the Union Budget 2023 in the Parliament on February 1. This is the last full Budget of the Modi government before the general elections in 2024.
Budget is often considered a complex subject with many unaware of the terms used in the financial document and during the presentation. Here's explaining two of them – capital expenditure and revenue expenditure.
Definition of Capital Expenditure
Capital expenditures or capex are the expenditures incurred for high value items and they fulfill the requirements for long term. These expenditures are also called long-term expenditures.
You incur capital expenditures when you pay for things like education, books, cell phones, laptops, or big-ticket items like a house or a car. Because these expenses are very valuable and long-lasting, they qualify as long-term expenditures.
Capital expenditure is any expenditure to buy a non-current asset, i.e. any asset that has more than one-year life.
Acquisition of fixed and intangible assets, upgrading an existing asset, repairing an existing asset, and loan repayment are the four categories of capital expenditures.
Capital Expenditure by Government
Setting up of schools, colleges, hospitals, bridges, roads, airports, etc. are capital expenditures of the government. The defense expenditures like purchasing a fighter jet or tanks are also capital expenditures.
Why Does Capital Expenditure Matter?
Capital expenditures boost the economy's capacity for production. In other words, such investments support future growth in the output of the economy.
Another factor supporting the necessity of government capital expenditures is the generation of jobs for households. For instance, infrastructure projects give families jobs, particularly for construction workers. As the demand for them rises, they also generate jobs for related businesses.
Further, capital expenditure increases the economy's demand for products and services, and is essential for boosting private sector economic activity.
Definition of Revenue Expenditure
Revenue expenditures are those expenses that do not result in the creation of assets. Basically, revenue expenditures or opex are short-term expenditures done within a year.
When you purchase a smart phone, it is capital expenditure but the expenditure incurred for recharge is revenue expenditure.
In the corporate world, revenue expenditure is any expenditure incurred to operate the business on a day-to-day basis. It includes daily running expenses such as rent, electricity, or any expenditure to maintain an existing asset. Wages and salaries to staff are also revenue expenditure.
Revenue Expenditure by Government
Grants that the central government awards to the governments of states and union territories are considered to be a form of revenue expenditure. For the government, revenue expenditures also include the interest payments on loans as well as the provision of subsidies such as those for food, fertilisers, and fuel.