Capex target should be set at 3.1% of GDP

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Subscribe to enjoy similar stories. India’s recent growth outcomes have been shaped to a significant extent by the Government of India’s (GoI) capital expenditure. The post-pandemic recovery in real GDP growth was supported by large expansions in the GoI’s capex, to the tune of ~30% per annum during FY21-24.

As a proportion of GDP, such capital spending had nearly doubled to 3.2% in FY24 from 1.7% in FY20, although a part of this is admittedly on account of off-budget capex that has now come on budget. Likewise, the recent slowdown in GDP growth, to 6.0% in H1 FY25 from 8.2% in FY24, has been partly driven by a slump in the GoI’s capital expenditure, which has witnessed a double-digit decline during this period, owing to the general elections in Q1 and the excess rainfall during the monsoon. Consequently, the GoI capex-to-GDP ratio fell to 2.7% during this period, i.e.

H1 FY25. Given this context, ramping up the GoI’s capex would play an important role in supporting growth outcomes in the near term, particularly when considerable global uncertainties abound and could pose downside risks to GDP expansion in FY26. With a contraction in the GoI’s capex during April-November 2024, the FY25 target of ₹11.1 trillion appears set to be missed by a considerable margin of around ₹1.4 trillion.

Our assessment suggests that there is space for the GoI’s capex target to be set at ₹11 trillion for FY26, similar to the budget estimate for FY25, which would entail a reasonably healthy expansion of ~12-13% in the coming fiscal. Moreover, this would imply a capex-to-GDP ratio of ~3.1% in FY26, marginally higher than the 3.0% expected in FY25, which is quite commendable. A target of ₹.