India

India Boosts Capital Spending Amid External Headwinds

By Banikinkar Pattanayak

New Delhi – India is intensifying its focus on capital expenditure (capex) to sustain growth as the economy faces rising external pressures, including higher energy prices linked to tensions in West Asia and global trade uncertainty. The Union finance ministry has directed government departments and ministries to prioritise capex and meet their annual targets, according to two officials who requested anonymity. The aim is to keep economic activity steady by pulling all domestic growth levers and giving private investment more time to develop.

During meetings over the past month to finalize revised estimates (RE) for the current fiscal year through March 2027, senior finance ministry officials urged counterparts in other ministries to monitor project execution more closely and increase spending on capital projects in the remaining months of FY27, even as they prepare proposals for next year’s Union budget. A senior government official who attended one of the meetings said, “The signal was clear. The finance ministry will provide for capital expenditure even in times of increased subsidy spending requirement. There could be some spending rejig elsewhere, but not in good capital projects.”

Queries emailed to the finance ministry on Friday remained unanswered by press time. The Centre’s capex rose 12.7 % year‑on‑year to ₹6.55 trillion in the first half of the fiscal year, but spending fell in August and September after a jump in earlier months. Capex will now need to rise 16.2 % in the second half (October‑March) to meet the FY27 budgeted target of ₹12.2 trillion, latest official data showed.

At an HSBC event in Mumbai on 2 November, Finance Minister Nirmala Sitharaman stressed that the Centre would sustain its capital expenditure push without compromising fiscal prudence. “Capex is a very important component of our growth strategy. Because until such time the private sector will be able to expand capacity or make capital investment, it is important for the government to push through with capital investment,” she said.

Public investment has become a key driver of India’s economic recovery and growth since the pandemic. Unlike subsidies or salaries, which are consumed quickly, spending on roads, railways, ports and power creates durable assets, generates construction jobs, lowers logistics costs and helps spur private investment. Every rupee spent on infrastructure is estimated to return ₹2.5 to ₹3.5 to the economy over the medium term, according to the Economic Survey for 2025‑26.

The Centre has raised its capital outlay substantially over the past decade, and more so in recent years to revive a pandemic‑hit economy. Its capex outlay stands at 3.1 % of GDP now, up from 1.7 % in the pre‑pandemic year of FY20. Capex has risen from ₹2 trillion in FY15 to a budgeted ₹12.2 trillion for 2026‑27.

Icra chief economist Aditi Nayar noted that capex growth tapered to just 2.8 % in the July‑September period from 23.7 % in the first quarter (April‑June), which may weigh on GDP growth outcomes. After a stronger‑than‑expected expansion of 7.8 % in the June quarter, India’s growth is projected to slow to 7.35 % in the September quarter, the Department of Economic Affairs said in its monthly review last week, citing its nowcasting model.

Growth faces pressure from elevated energy prices amid the West Asia conflict, although the Indian economy remains resilient. Many global agencies, including the International Monetary Fund and the World Bank, project growth at 7 % or more in the current fiscal, keeping India as the world’s fastest‑growing major economy.

To ensure that states “accelerate capital spending” on top of welfare expenditure, the Centre has handed them ₹2.18 trillion in the past week as part of its tax devolution. On 31 October, the Centre released an additional ₹1.09 trillion to states above their regular monthly share. On Thursday, it advanced the November installment of another ₹1.09 trillion by five days, ahead of Diwali. The tax distribution particularly benefits states that have been at the forefront of capital expenditure. Uttar Pradesh received ₹19,208 crore in each tranche, followed by Bihar at ₹10,845 crore, Madhya Pradesh at ₹8,010 crore, Odisha at ₹4,819 crore and Assam at ₹3,552 crore. Maharashtra received ₹7,022 crore and Tamil Nadu ₹4,466 crore.

The Centre has also budgeted ₹2 trillion in interest‑free, long‑term loans to states for FY27 to support the creation of durable public assets. Meanwhile, capital expenditure by large central public sector enterprises and select government entities has reached 51 % of the FY27 target of ₹8.43 trillion, as growth‑supporting investment remains in focus.