States’ capex grew by 10% in FY25 to Rs 8.9 lakh crore, a lower increase compared to the previous three post-pandemic years, mainly because of election-related disruptions.
States’ capital expenditure has shown a strong upward trajectory over five years, supported by the Centre’s interest-free 50-year capex loans. States’ investment rose from Rs 4.6 lakh crore in FY21 to Rs 8.9 lakh crore in FY25. After flat growth in FY21, the pandemic year, capex expanded sharply—23.9% in FY22, 17.5% in FY23, and 20.9% in FY24—before moderating to 9.9% in FY25, indicating sustained infrastructure focus by states, the Reserve Bank of India’s “State Finances: A Study of Budgets” for 2025-26.
Revenue expenditure growth accelerated sharply to 15% during April–October 2024-25, while capital expenditure moderated during this period, largely due to a high base effect and the Model Code of Conduct in force during the general elections. However, capex began recovering from October 2024 and gathered pace in the latter half of the year.
Despite short-term fluctuations, the broader capital expenditure trajectory remained intact. States maintained capex at 2.7% of GDP in both 2023-24 and 2024-25, and budget estimates for 2025-26 project a rise to 3.2% of GDP, underscoring a sustained infrastructure focus. The spending push has been aided by the Union government’s 50-year interest-free loan scheme, which has incentivised states to prioritise long-term asset creation. Irrigation, water supply, transport and urban infrastructure projects have led this expansion.
Quality of Spending
Expenditure quality indicators show marked improvement. The share of capital expenditure in total expenditure rose steadily from 13.4% in 2020-21 to 18% in 2025-26 (BE). At the same time, the revenue expenditure-to-capital outlay ratio has declined, signalling a structural shift away from consumption-led spending. The share of revenue deficit in gross fiscal deficit has fallen sharply from 46.1% to 6.9% over the same period, indicating that borrowings are increasingly funding productive investments, the RBI noted.
Policy frameworks could further strengthen this trend. Adoption of a Medium-Term Expenditure Framework (MTEF) would improve planning certainty and accountability. Revisiting the “golden rule” of public finance—financing current expenditure from revenue and capital spending through borrowings—could also safeguard capex while maintaining fiscal responsibility targets.
Central Assistance and Policy Reform
Central support remains significant. Under the Scheme for Special Assistance to States for Capital Investment, nearly the entire Rs 1.5 lakh crore allocation for 2024-25 was released. Reform-linked conditions have further encouraged fiscal discipline and infrastructure prioritisation, reinforcing states’ medium-term growth orientation.