India steps up public investment push as external risks mount

New Delhi: India is stepping up efforts to sustain growth-driving capital expenditure (capex) as the economy faces mounting external headwinds, including elevated energy prices amid geopolitical tensions in West Asia and uncertainty over global trade.

The Union finance ministry has asked government departments and ministries to prioritise capital expenditure and ensure they meet their annual capex targets, two officials aware of the development said. The idea is to prevent economic activity from flagging amid external headwinds by pulling all domestic growth levers and allowing more time for private investment to take root, they said, requesting anonymity.

In meetings over the past month to finalise revised estimates (RE) for the current fiscal through March 2027, senior finance ministry officials have urged their counterparts in other ministries and departments to track project execution more closely and step up spending on capital projects in the remaining months of FY27, even as they prepare proposals for next year's Union budget.

“The signal was clear. The finance ministry will provide for capital expenditure even in times of increased subsidy spending requirement. There could be some spending rejig elsewhere, but not in good capital projects,” said a senior government official who attended one of the meetings recently.

Queries emailed to the finance ministry on Friday remained unanswered till press time.

While the Centre's capex rose 12.7% year-on-year to ₹6.55 trillion in the first half of the fiscal year, spending fell both in August and September after a jump in earlier months. Capex will now need to rise 16.2% in the second half (October-March) to meet the FY27 budgeted target of ₹12.2 trillion, latest official data showed.

At an HSBC event in Mumbai on 2 November, finance minister Nirmala Sitharaman stressed that the Centre would sustain its capital expenditure push without compromising on fiscal prudence. "Capex is a very important component of our growth strategy. Because till such time the private sector will be able to expand capacity or make capital investment, it is important for the government to push through with capital investment."

The government's capex push is critical because public investment has emerged as a key driver of India's economic recovery and growth since the pandemic. Unlike subsidies or salaries, which are consumed fast, spending on roads, railways, ports and power creates durable assets, generates jobs during construction, lowers logistics costs and helps spur private investment.

Every rupee spent on infrastructure gives back ₹2.5 to ₹3.5 to the economy over the medium term, according to the Economic Survey for 2025-26.

The Centre has raised its capital outlay substantially over the past decade, and more so in recent years to nurse a pandemic-hit economy back to health quickly. Its capex outlay stands at 3.1% of gross domestic product now from 1.7% in the pre-pandemic year of FY20. Its capex outlay has risen from ₹2 trillion in FY15 to a budgeted ₹12.2 trillion for 2026-27.

The Centre's capex growth tapered to just 2.8% in the July-September period from 23.7% in the first quarter (April-June), "which may weigh on the GDP growth outcomes", according to Icra chief economist Aditi Nayar.

After a stronger-than-expected expansion of 7.8% in the June quarter, India's growth is projected to have slowed to 7.35% in the September quarter, the Department of Economic Affairs said in its monthly review last week, citing its nowcasting model. Growth faces pressure from elevated energy prices amid the West Asia conflict, although the Indian economy remains resilient. India is projected by many global agencies, including the International Monetary Fund and the World Bank, to grow at 7% or more in the current fiscal, retaining its status as the world's fastest-growing major economy.

Capex boost for states

To ensure that even states “accelerate capital spending”, on top of welfare expenditure, the Centre has handed them ₹2.18 trillion in the past one week, as part of its tax devolution.

On 31 October, the Centre released an additional ₹1.09 trillion to states as tax devolution, over and above their regular monthly share. On Thursday, it advanced the November installment of another ₹1.09 trillion by five days, ahead of Diwali.

The tax distribution particularly benefits states that have been at the forefront of capital expenditure. Uttar Pradesh received ₹19,208 crore in each tranche, followed by Bihar at ₹10,845 crore, Madhya Pradesh at ₹8,010 crore, Odisha at ₹4,819 crore and Assam at ₹3,552 crore. Maharashtra received ₹7,022 crore and Tamil Nadu ₹4,466 crore.

The Centre has also budgeted ₹2 trillion in interest-free, long-term loans to states for FY27 to support the creation of durable public assets.

Meanwhile, capital expenditure by large central public sector enterprises and select government entities has reached 51% of the FY27 target of ₹8.43 trillion, as growth-supporting investment remains in focus.