With a total of 18 states (hereon referred as S-18) already having announced their budgets till date, Elara Capital said, growth in capital outlay is projected to normalize to 15.9 per cent YoY in FY26B versus prior two years’ average growth of 23.4 per cent YoY, mimicking the trend seen in the central budget this year. However, as a rate of GSDP, the capital outlay has been steady at 2.8 per cent, a tad above 2.7 per cent in FY25RE. “Yet, with only 54.3 per cent of the revised estimates being spent till January this financial year, it seems unlikely that the target for FY25RE will be achieved,” it said.
It is worth noting here that the deviation in spending in revised estimates has averaged at 13.5 per cent in the past decade, with deviation in FY24RE versus FY24 actuals being -14 per cent. The spending is moving away from traditional sectors to emerging sectors like Water Supply, Sanitation, Digital Infrastructure, Urban, and Irrigation in FY26. “The pivot away from traditional sectors such as Roads, both by the Centre and states, to emerging sectors such as Water Supply, Sanitation, Digital Infrastructure, Urban, and Irrigation will aid order inflows for diversified infrastructure companies such as L&T over sectoral specialized companies,” Garima Kapoor, Economist and Executive Vice President, Elara Capital.
Capex spending by states normalizing
After a robust 19.9 per cent YoY growth in FY25RE, the growth in states’ capital spending is set to moderate to 15.9 per cent YoY, reflecting a measured approach amid rising welfare spending and a push to rein in fiscal deficits. This mimics the trend in the Centre for FY26, for which the capital outlay is expected to grow by 10.08 per cent YoY in FY26BE, following a growth of around 30 per cent through FY21-24.
Maharashtra to de-grow capital outlay, AP to grow in FY26
After projecting a massive overspending in FY25, Maharashtra has budgeted a de-growth in capital outlay by 11.1 per cent YoY in FY26, against a 31 per cent YoY growth in FY25, stated Elara Capital report. Other states that have seen a decline in allocation to capital outlay in FY26 are Bihar (-7.2 per cent), Assam (-13.4 per cent), and Himachal Pradesh (-55 per cent). On the other hand, the report maintained that states such as Gujarat, Andhra Pradesh and Uttar Pradesh continued to push ahead with robust capital investment plans. “Andhra Pradesh leads with an impressive 68.8 per cent YoY increase, followed by Gujarat (36.1 per cent) and Uttar Pradesh (11.9 per cent). Odisha has also shown resilience, posting a 17.4 per cent growth in its capital outlay following 28 per cent YoY growth despite elections,” Elara Capital said.
Shift to non-traditional sectors
Increased focus on sectors such as Water Supply and Irrigation away from Roads indicates a shift in government priority. Per the analysis report, “The overall budget for Transport is expected to increase by 3.2 per cent YoY in FY26, following an 18.3 per cent average growth in the past four years. On the other hand, allocation to Water Supply & Sanitation and Irrigation is expected to grow by 33.54 per cent YoY and 19.56 per cent YoY, respectively, following 8.03 per cent and -1.32 per cent YoY growth in FY25RE.”
Sluggish capex execution in some states concerning
With states focusing more on welfare schemes, project execution at the state level is being challenged. This, per Elara Capital, is visible from the fact that Maharashtra (10 per cent of the total capital outlay of all the states put together) is expected to de-grow its capital outlay in FY26BE by 11.1 per cent YoY – the first time since Covid-19. The other two states that have budgeted for a de-growth are Assam (-13.4 per cent YoY) and Himachal Pradesh (a whopping 55 per cent YoY).
Further, Elara Capital said, “Sluggish spending momentum in large states is brewing working capital challenges for MSMEs.”