After holding the Union government’s capital expenditure (capex) budget at about Rs 11 lakh crore for two successive years, the Centre is likely to step up its investment push in FY27, with the outlay possibly rising to around Rs 12.5 lakh crore.
The increase is being seen as a counter-cyclical measure to support domestic economic activity at a time when global uncertainties—particularly those arising from tariff actions by the United States—could weigh on exports, private investment and overall growth.
Even with the expected increase, the government is likely to keep the capex-to-GDP ratio close to 3%, a level widely regarded as fiscally prudent while still allowing for asset creation.
Logic behind the prediction
From a public finance perspective, a 3% capex ratio is considered optimal, much like the original Fiscal Responsibility and Budget Management (FRBM) Act’s benchmark of a 3% fiscal deficit. In FY26, capital expenditure is estimated at about 3.14% of GDP. The capex outlay could translate into roughly 3.18% of GDP in FY27 once nominal growth of around 10% is factored into the advance estimate of Rs 357.14 lakh crore for FY26.
Officials indicate that a rise in FY27 is likely after two years of status quo. “The capex target has not changed in the previous two budgets, and the offtake in the current year has been very strong. So, there could be a 10–15% increase in capex outlay in FY27,” a government official said.
A key area where much of the incremental outlay may be directed is the Centre’s grant-like Scheme for Special Assistance to States for Capital Investment (SASCI). Under this programme, the Union government provides 50-year interest-free loans to states for capital spending.
The scheme, introduced in FY21 to revive growth in the aftermath of the pandemic, has become a central pillar of the Centre’s investment strategy, particularly at a time when private capex remains uneven and many states face fiscal constraints. Notably, the budgeted outlay for this scheme has been held at Rs 1.5 lakh crore for the past two years, prompting repeated calls from states for an increase.
Given these demands, the government is expected to channel a significant portion of the FY27 capex increase towards expanding the capex loan programme. Officials suggest that any enhancement could be linked to reforms aimed at improving the ease of doing business and accelerating projects of national importance.
What do economists say?
Economists broadly share this assessment. ICRA chief economist Aditi Nayar expects the government to first raise FY26 gross capex by about Rs 20,000-30,000 billion to roughly Rs 11.5 lakh crore from the budget estimate of Rs 11.2 lakh crore. “Thereafter, the GoI is likely to peg the gross capex at around Rs 13.1 lakh crore in the FY27 BE, implying a 14% growth on the enhanced base,” she said. According to Nayar, most of the increase in FY27 is likely to come from a higher outlay for the capex loan scheme for states.
Nayar also pointed out that the design of the scheme allows spending on areas that fall squarely within state jurisdiction, whereas the Centre’s own capital outlay is typically concentrated in sectors such as roads and highways, railways and defence. This flexibility makes the state loan programme a more effective tool for broad-based infrastructure creation across regions.
Madras School of Economics Director N.R. Bhanumurthy echoed the call for a higher allocation to the scheme. “There are many states that may be willing to borrow more compared to this year,” he said, adding that better-performing states are likely to be able to meet the reform conditions attached to the programme.
Bank of Baroda chief economist Madan Sabnavis projected that FY27 capex could be 5–10% higher than the revised estimate for FY26. While he agreed that an increase in capex loans to states would be useful, he cautioned that the actual size of the allocation would depend on how effectively states have utilised the funds in FY26.
India Ratings chief economist Devendra Kumar Pant expects the Union government’s capex outlay, including loans to states, to remain close to 3% of GDP in FY27. Emphasising the role of states in driving infrastructure investment, Pant noted that the multiplier from state-level capex is higher than that of the Centre. “We expect the central government to continue to maintain the pace of loans to states for capex,” he said.
Including Grants in Aid of Rs 4.27 lakh crore for the creation of Capital Assets, the Centre’s capex was estimated to be Rs 15.48 lakh crore or 4.3% of GDP in FY26.