Govt may lift capex beyond budget as private sector stays cautious
- The Centre has fiscal space to raise capital expenditure by ₹20,000-30,000 crore in FY26, riding buoyant tax revenues and a record RBI dividend transfer, as private investment remains sluggish amid global headwinds.
New Delhi: The Centre has the fiscal space to lift infrastructure spending beyond the budgeted ₹11.21 trillion for this financial year if private sector spending remains subdued amid global headwinds, two officials said.
The government has room to increase its 2025-26 capital expenditure by ₹20,000-30,000 crore, contrasting with FY25’s cutbacks and taking it closer to ₹11.5 trillion, they added.
Even if its spending runs slightly above target, the government will stick to its fiscal deficit goal of 4.4% of GDP for FY26, supported by buoyant tax collections and a record dividend transfer from the Reserve Bank of India, the officials said, declining to be identified.
Despite repeated calls from the government, private sector investment has been slow to pick up, weighed down by the US’s tariff pressure on exports and other external challenges.
Gross fixed capital formation, a proxy for investments, slowed to 7.8% in April-June from 9.4% in the preceding quarter, but still showed signs of robust growth supported by higher year-on-year government capital expenditure.
“The Centre has been asking industry to step up, especially after a series of reforms. But until that happens, the government will continue its capex push," one of the two officials said.
The government’s capital spending on infrastructure accelerated to ₹3.47 trillion in April-July from ₹2.61 trillion in the same period last year. In FY25, the government trimmed its budgeted capex of ₹11.11 trillion to ₹10.18 trillion, with actual expenditure at ₹10.52 trillion.
Last week, Union finance minister Nirmala Sitharaman urged industry to shed its caution and expand capacity, stressing that the government had delivered on tax reforms, foreign investment liberalization, and improvements in ease of doing business. She also urged businesses to invest in job creation and collaborate with the government on upskilling the workforce.
Meanwhile, anticipated strong consumption during the festive season, along with additional gains from GST rate rationalization, is expected to boost government revenues. The Centre’s capex spending is also expected to pick up in the second half of the year.
“Several infrastructure projects that had stalled have regained momentum. So, capex spending could rise further in the second half of the fiscal year," said the second official. “As things stand, there’s fiscal space to increase capex spending by another ₹20,000-30,000 crore in FY26, especially in sectors which have seen lower investments."
- Riding on buoyant tax revenues and a record RBI dividend, the Centre has fiscal headroom to lift spending above the budgeted ₹11.21 trillion, even while sticking to its 4.4% deficit target.
- Despite reforms and repeated government nudges, sluggish private investment and global headwinds mean the Centre’s infrastructure push will remain the primary growth driver.
- Higher capex can spur productivity and jobs but risks straining fiscal targets, with GST reforms and tax cuts potentially reducing revenue buffers.
Financing higher capex—a challenge
During FY25, the Centre’s capital expenditure stood at ₹4.15 trillion, or 37.3% of the budgeted target, at the end of the first six months, before reaching ₹10.52 trillion by the end of the fiscal year, showing clear backloading with ₹6.37 trillion spent in the final six months.
In comparison, FY24’s capex target of ₹10 trillion saw ₹4.9 trillion spent in the first six months and about ₹9.5 trillion by year-end, largely due to lower-than-expected utilization of certain loan schemes by states.
Experts said accelerating central capex can spur demand and incomes through a strong multiplier effect, complementing recent cuts in direct taxes, GST reforms, and monetary easing.
“The government’s current capex execution trajectory signals robust momentum that merits strategic acceleration rather than wholesale expansion. This would imply focusing more on projects that are nearing completion to ensure near term positive effects," said Rishi Shah, partner and economic advisory services leader, Grant Thornton Bharat.
“The GST reform should also aid growth by pushing consumption and opening up more space for private sector investments, which we believe are likely to remain volatile on the back global uncertainties," he added.
“Higher capex spending will add to productivity as well as long-term growth potential. That said, higher than allocated capex may strain the fiscal deficit as well," said Rumki Majumdar, economist at Deloitte India. “The government will have to balance growth priorities with fiscal prudence this fiscal."
D.K. Srivastava, chief policy advisor at EY India, said actual government expenditure in the first four months of FY26 had already reached 30.9% of the budgeted target of ₹11.2 trillion for the fiscal year.
“If this momentum is maintained, it is likely that capital expenditure would meet the budgeted target. Since the implicit year-on-year growth rate of 6.6% is rather low, it is desirable to increase the volume of (the government’s) capital spending," he said.
“However, financing such an increase may pose a challenge. The fiscal deficit target of 4.4% of GDP is likely to come under pressure due to revenue foregone from [personal income tax] and GST reforms," he added.
Srivastava added that while RBI’s higher-than-anticipated dividend would help, it may not fully offset the revenue foregone, and the feasibility of increasing capex should be carefully considered once GST revenue performance under the new rate structure becomes clearer.
A ministry of finance spokesperson did not respond to queries emailed on Monday.
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