After years of govt capex push, private sector may finally pick up the baton

To be sure, even the 11.9% growth in gross fixed capital formation (GFCF) at constant prices in the April-June quarter of the current financial year was largely aided by public capex.

The good news is that there are now some signs that private sector capex is on the rise. However, the investment binge may still be largely confined to the services sector, and a few emerging areas like data centres, artificial intelligence and nuclear energy. A sustained momentum in sectors like electronics and renewable energy is also supporting capital formation.

Manufacturing sector as a whole is still lagging, with conventional employment-intensive industries continuing to witness sluggish investments.

Since the pandemic, the central government increased its capital expenditure sharply from around 1.5% of GDP to over 3% of GDP. State governments and Central and state PSEs have also driven investments in good measure over recent years, causing the share of public capex in GCCF to rise.

The Centre itself has set a target of Rs 12.2 lakh crore of capital expenditure this year, sharply higher than around Rs 3 lakh crore seen in the early part of the decade. This sharp rise in investment by the Centre has helped the Indian economy grow above 7% for the last three years, including at 7.8% in 2025-26. Even this year, investments were the main growth driver.

Government data released Monday showed India’s GDP grew 7.8% in the April-June quarter despite the impact of the war in West Asia. This growth was primarily driven by an 11.9% rise in investments, the highest growth in the current GDP series, which has data since FY23.

In current prices, investment growth was 20.4% in Q1FY26, also the highest in the current GDP series.

Investments in constant prices made up 34.4% of GDP in April-June, up from 33.1% in January-March. On average, the investment share in GDP was 33.3% in FY26, 33.2% in FY25, and 32.9% in FY24.

Capital spending by the central government and public sector companies drove this rise in investments: Centre’s capex rose 25% in April-June while state-owned companies’ capex was up 24% year-on-year.

“The sharp acceleration in GFCF (gross fixed capital formation), together with its higher share of GDP, points to a strengthening investment cycle rather than a consumption-only recovery,” said Radhika Piplani, chief economist at Motilal Oswal Financial Services. The increase in the investment share in GDP is “particularly encouraging, suggesting that capital formation is becoming a larger and more durable source of growth,” Piplani said.

According to IDFC FIRST Bank Chief Economist Gaura Sen Gupta, there are “nascent signs” of private capex recovery. Data such as the rise in bank credit to the infrastructure sector, pickup in capital goods imports, capital goods production, and better corporate balance sheets all point to a pickup in private investment, Sen Gupta said.

Bank credit to the infrastructure sector has continued to rise in recent months, rising 10.2% year-on-year in July, much higher than 3.4% a year ago, as per Reserve Bank of India (RBI) data. Indeed, bank credit to infrastructure has been in double digits in the first four months of FY27. The last time credit growth to industry was in double digits before FY27 was in November 2022.

Industrial activity has also been recovering in FY27 with the Index of Industrial Production (IIP) growth averaging 6.3% in the first four months of FY27, higher than 4% in the same period last year. This recovery in industrial performance in increasingly led by investments by the private sector, with capital goods and intermediate goods output growing 15.4% and 9.4% in April-July, respectively. In the same period last year, capital good output had risen 8.1% and intermediate goods output 4.6%.

Corporates have also been announcing many more projects in recent quarters as capacity utilisation rates rise and consumer demand holds up thanks to the income tax and goods and services tax (GST) cuts announced over the last two years. A worrying factor is that the larger space of MSMEs is still not keeping pace with large corporates.  

According to data from the Centre for Monitoring Indian Economy (CMIE), projects totalling Rs 17.9 lakh crore were announced in the June quarter, the highest in five quarters, and up 53% year-on-year.

Private sector accounted for 86% of the total projects announced in April-June, which is the highest since July-September 2011. A large part of the proposed investments by corporates are in the Information Technology Enabled Services (ITES) sector, particularly in data centres and the artificial intelligence space.

“This is clearly the next big thing in the country which will see exponential expansion and involves large investment. The Union Budget had also specifically had measures with respect to data centres,” Bank of Baroda Chief Economist Madan Sabnavis had said in a report in August.

Other sectors seeing large private investment include the conventional electricity space, including nuclear energy, electronics manufacturing, and renewables. However, bulk of the investments being announced are in the services sector, and not manufacturing, CMIE data showed.

Economists at Morgan Stanley believe that the strength in investment activity reflects that India is on the cusp of a capex super-cycle, led by energy transition investment, defence manufacturing, industrial capacity expansion, and infrastructure development.

The actual extent of the private sector investment recovery will only be known in a few years time, when the statistics ministry released its national accounts data, typically with a lag of around 11 months.