CAPEX TARGET
FY26 Budget may target minor rise in capex to INR 11.2 tln, say economists
This story was originally published at 11:39 IST on 29 January 2025
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By Shubham Rana
NEW DELHI – The government may raise its capital expenditure target for 2025-26 (Apr-Mar) only marginally to INR 11.2 trillion or so in the upcoming Budget, according to an average of estimates from 17 economists. While this would still represent a new record, the pace of increase is set to slump compared to the current year's Budget Estimate of INR 11.11 trillion. Economists' estimates for capital expenditure were in the range of INR 10.7 trillion-INR 12.0 trillion.
"…the government's ability to execute or fully utilise capex Budget has reached a limit. This is not surprising when we consider that capex as a share of GDP was 1.7% in FY20. Strip out defence capex and the ratio has jumped from 1.1% in FY20 to 2.9% in FY25BE (Budget Estimate)," economists from ICICI Securities Primary Dealership said in a note.
The government's capital expenditure rose sharply at the start of the decade as it chose to revive growth, which was impacted by the COVID-19 pandemic, by pushing hard on investments. From FY21 to FY24, the growth in capital expenditure was 30% on average every year before it slowed down to 17% in the FY25 Budget. Economists expect this year's target to be missed significantly, and see the revised estimate to be around INR 9.95 trillion. This would imply that next year's estimated target would be 12.7% higher.
Election-related restrictions in the first half of the year hampered the government's investments, with Apr-Nov seeing investment of INR 5.14 trillion, accounting for just 46.2% of the full-year target. The lower capital expenditure has weighed on economic growth, with India's GDP estimated to grow at a four-year low pace of 6.4% in FY25. With growth cooling, economists said capital expenditure by the government remains a priority, although they pushed for more focus on execution and implementation to ensure the target is met.
LOANS TO STATES
A key component of the Centre's capital expenditure allocation has been long-term, interest-free loans to states. Introduced only after the onset of the pandemic, the allocation for the investment assistance scheme has risen sharply, with the FY25 Budget setting aside INR 1.50 trillion for the same.
However, a big miss is expected on this front. In FY24, the Budget allocation of INR 1.30 trillion was missed by nearly INR 250 billion. According to Barclays' economists, the allocation for capital expenditure loans may be reduced in FY26 "with the absorptive capacity of state governments lagging".
Some economists also made a case for the Centre to relax the conditions which must be met for states to avail a large part of these loans. However, according to Nikhil Gupta and Tanisha Ladha of Motilal Oswal Financial Services, the "worrying" trend of more and more welfare schemes at the Centre and state levels called for these loans to be made conditional.
"If states have the resources to announce cash transfers or other welfare schemes, then the need for interest-free loans for capex to states by the central government must be reviewed," Gupta and Ladha said in a note. According to them, these loans should be linked with some conditions, such as the achievement of capital expenditure by each state versus its Budget Estimate and the ratio of welfare schemes, cash transfers, and current spending for capital expenditure. "The higher the former and lower the latter, the more the state deserves capex support from the central government. Such conditions would help bring some fiscal discipline." End
Edited by Tanima Banerjee
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