The Centre, states, and central public sector enterprises (CPSEs) will likely invest around Rs 27.5 lakh crore 2025-26, a sub-10% gowth in public capex for the second consecutive year. This comes after registering 15-16% growth in such asset-creating spending by the government sector between FY22 and FY24, according to an FE analysis based on information gathered from different sources.

The Centre is unlikely to go for a big increase in its budgetary capital expenditure target for the next fiscal year. It may peg the target at around Rs 11 lakh crore for the next fiscal, which is the budget estimate (BE) for the current year.

For 2024-25, the Centre had set a capex target of Rs 11.11 lakh crore, a 17% increase over Rs 9.5 lakh crore achieved in FY24. Officials, however, reckon that actual spending will be around Rs 10.2 lakh crore during the year.

Clearly, the post-Covid surge in public capex has begun to slow down as is evident from the trend so far with the Centre, states and central agencies showing an annual decline in their capex so far in FY25. Besides election-induced delays, government officials blame it on capacity constraints due to continued acceleration in public investment in recent years.

As a result, public investment — by the Centre, states, central agencies and the Centre’s assistance for the creation of capital assets — is likely to rise by a moderate 8% to Rs 25.5 lakh crore in FY25, compared with the growth of 16% seen in FY24 (see chart). It is likely to rise by 8% on year in FY26.

Post-Covid, the Centre’s capex has grown on an average of 30% between FY22 and FY24 as the government adopted a capex-led growth strategy, taking such productive spending to a desirable 3% of GDP for the first time in FY24.

Despite the support from the Centre by way of liberal capex loans, states’ investment likely fell by nearly 7% on-year in April-November of the current financial year, while their borrowings dipped by 4%, reflecting the continuing slack.

Going by the trend so far, the states in aggregate may invest around Rs 8 lakh crore in FY25, the same as in FY24. They might increase investment by about 10% to Rs 8.8 lakh crore in FY26.

“Given the early trends, we are apprehensive that state and Central capex would fall short of the respective budget estimates for FY2025, by around Rs 1 lakh crore each. Relative to this, the Budgets for FY2026 may target a low double-digit growth,” ICRA chief economist Aditi Nayar said.

Given the moderation in the Centre’s overall capex, the outlay for central transfer for the creation of capital assets under various central schemes may also be around Rs 4 lakh crore in FY26, the same as the estimate for FY25. The Centre’s transfers for the creation of capital assets may see some shortfall in FY25, given the slower pace of spending.

The investment by the CPSEs (excluding agencies like NHAI and railways, which are funded through budget) may improve to Rs 3.4 lakh crore in FY25 from Rs 3 lakh crore in FY23, an increase of 13% on year. The CPSEs’ capex growth may moderate to about 9% at around Rs 3.7 lakh crore in FY26.

In the absence of a broader private sector capex revival, a slower pace of public investment has dampened the economic growth in the current financial year.

The gross domestic product (GDP) rose by 5.4% in July-September on-year, the lowest in seven quarters, as weaker expansions in manufacturing and consumption hurt the economy. Policy makers have acknowledged several challenges ahead for India including the impact of saturation of wages on consumption, plateauing of global demand and climate impact on agriculture. Some analysts feared that FY25 growth may come in below 6.5% as against the Economic Survey projection of 6.5-7%.

In their meeting with Prime Minister Narendra Modi, a group of economists made a strong pitch for a new set of reforms to seamlessly integrate India with the global supply chains, including an aggressive pursuit of free trade agreements (FTAs), easing of land and labour market rigidities to attract private investment.