Centre likely to maintain capex push in FY26 to aid economic growth amid sluggish state spending

At that level, the capex support may hover around ₹12 trillion next fiscal in absolute terms, the people said.

“The Centre is expected to maintain its capex push in the upcoming budget to drive economic growth, as private sector investments are still gradually gaining momentum—though some sectors have seen an uptick—and state-level capex remains sluggish so far," the first person cited above said on the condition of anonymity.

Also Read: Centre likely to miss ₹1.5 trillion capex loan target for states in FY25

For the current fiscal, the Centre’s capex plans stand at about ₹11.11 trillion, up 11% from FY24’s budgeted estimate of ₹10 trillion. The people cited above said that the FY26 budget may project capex growth at 7-10%. The revised estimate of capex for FY24 stands at ₹9.5 trillion.

The capex plan for 20 major states during FY25 stands at about ₹8.5 trillion, according to the latest budget documents.

A finance ministry spokesperson didn’t respond to Mint’s emailed queries.

With GDP growth likely to fall below the 2024-25 target, the Centre will need to marginally increase its capex to maintain a similar nominal GDP growth target for the next fiscal year. But capex growth will remain moderate in percentage terms.

The government expects India’s nominal GDP to expand by 10.5% to ₹326.4 trillion in 2024-25, slightly lower than the ₹327.7 trillion projected in the interim budget.

Also Read: Centre to release about ₹50,000 cr- ₹70,000 cr of interest-free capex loans to states in Q3, FY25

Nominal GDP expanded by 8.9% to ₹153.91 trillion in the first six months of the current fiscal, against ₹141.40 trillion in the year-ago period, per estimates by the ministry of statistics and programme implementation (MoSPI).

The first person said that higher capex spending could be expected from the central and state governments during the current fiscal’s second half, following the general election-led slowdown in the first half.

The capex slowdown

A report by CareEdge in November said India’s public capex saw a significant decline in the first half of FY25, with central capex shrinking 15.4% and aggregate state capex falling 10.5% year-on-year.

The Centre achieved only 37% of its budgeted capex target during April-September, while 20 major states collectively reached only 28%.

“Marginal recovery in the public capex was witnessed in the September quarter, led by central capex, which grew by 10.3% on-year in the second quarter. However, state capex continued in the contractionary zone as it fell by 3.8% on-year," the rating agency said in the report.

The report added that on the corporate capex front, the aggregate capex of a sample set of companies (1,074 non-financial listed companies) was seen at ₹9.4 trillion in 2023-24, marginally lower than last year.

However, the central government's capex is expected to surge by 25% on-year during October-March, according to a recent report by Jefferies.

A finance ministry spokesperson didn't respond to Mint's emailed queries.

The slowing economy

India’s real GDP grew by 5.4% in the September quarter, the slowest in nearly two years, due to a slowdown in manufacturing, urban consumption and low corporate earnings, showed MoSPI data last week.

Also Read: MoSPI's first-ever private capex survey to track investments in 10-15 key sectors

Considering India’s real GDP growth stood at 6% for the first half of the fiscal year, the economy needs to expand by at least 8.3% in the second half to meet the Reserve Bank of India’s (RBI) projection of 7.2% growth for the current fiscal year.

Experts believe that with the second quarter real GDP growth falling short of expectations, the government is likely to prioritize capex growth in the 2025-26 budget to bolster demand while working to reduce the fiscal deficit and create room for monetary easing through policy rate cuts.

“Continuing global uncertainties and sluggish export growth require the government to continue to play a core role in supporting domestic demand. In the medium term, the Centre will continue to anchor India’s GDP growth through its capex support with the expectation that state governments and private sector investment will also be crowded in," said D.K. Srivastava, chief policy advisor, EY India.

“We do not expect central capex growth to moderate in 2025-26 below 10%. There is a continued deficiency of infrastructure in the country relative to its peer countries. The availability of suitable infrastructure would also reduce unit costs for private sector producers, making them more competitive in the medium term," he added.

Pronab Sen, economist and former chief statistician of India, said that while private capital expenditure is yet to pick up, states have some room to expand, though this varies based on their debt positions. But he emphasized that states could be reluctant to raise debt beyond a point, particularly with elevated interest rates.

“As far as the Centre is concerned, they should also be concerned about their debt position," Sen said. “That is way out of line with what their targets were because the original intent was to bring down the Centre's debt GDP position to 40%. We have moved in exactly the opposite direction as it is upwards of 65% now."

He added that any increase in the capex will depend on how much the government can reduce its current expenditures, aiming to bring the fiscal deficit closer to 4% (in the medium term), limiting rapid capex growth.

Also Read: Capex mood picks up in Q2, but revival isn't broad-based