Rising capital expenditure in the construction industry…
However, capital expenditure in the construction sector has risen by around 8% (as a percentage of GDP) over the past year. Let’s see what are the reasons for this.
1. Home loan interest rates are at record lows and major financial institutions like HDFC and ICICI are offering high volume home loans.
2. States like Maharashtra, Karnataka and West Bengal have significantly reduced stamp duty on home purchases.
3. This year’s Union Budget has earmarked a huge amount (3% of GDP) as capital expenditure (government expenditure) on construction.
A good example of this is the 20-25% growth (year-on-year) in turnover of companies that manufacture and sell construction materials such as Asian Paints, Bidlite and Ultra Tech.
As capital expenditure increases, rising employment…
There is one thing we should pay attention to. Be it Mumbai Metro construction or road construction by the government or NHAI, huge machines are being used more and more these days. Previously many low-skilled workers were involved in these tasks. As machines are now being used to replace workers, employment for low-skilled workers in the construction industry will begin to decline.
At the same time, the demand for highly skilled and medium-skilled workers is increasing significantly in the formal sector. 3.2 crore jobs have been created in the formal sector in the last four years. At the same time, it should also be noted that the demand for low-skilled workers has decreased by almost the same number.
New capital expenditure of 30 – 35% of GDP has been done over the last ten years to generate this much rapid employment. It is because of this high level of capital expenditure that employment opportunities are created to this extent and the economy is on the path of development.
Increasing capital expenditure in the technology sector…
The capital expenditure we have seen so far covers sectors that contribute about three-fourths of the total capital expenditure. Capital expenditure is also increasing exponentially in the technology sector, which contributes the rest. These capital expenditures are not accurately captured in government data. This is because of the guidelines and criteria that the government has for classifying capital expenditure.
According to the accounts provided by the Ministry of Corporate Affairs, companies can classify expenditure on intangible assets as capital expenditure only when it is possible to quantify the future income and use (contributing to the economy) of intangible assets (when the product is finished). That is, if a product is in research stage, the cost incurred for it should be classified as operating expenditure (Operating expenditure) according to the accounting practice.
Due to this, the companies that are trying to make new discoveries by doing a large amount of research have to write the expenses incurred for the same in the profit and loss account, but those expenses cannot be classified as capital expenditure required to create an asset. For example, in our company we spend a lot on CRM systems, forensic accounting algorithms, website etc. Although we argue that these are costs similar to the cost of setting up a manufacturing plant for a manufacturing company, current accounting practices do not allow us to show these as assets (capital costs). We have to write off the cost of all this in our profit and loss account and cannot write it off as long-term capital expenditure as per current practices. The same is the problem with technology companies.
Indian companies continue to make huge capital expenditures on computers and software. (See Table-1) Table-1 shows the growth rate of business done by leading computer and software companies in India.