Is India about to dramatically boost its infrastructure spending? A potential surge in government investment could be on the horizon, aiming to bolster economic activity amidst global uncertainties. The Union government might increase its capital expenditure (capex) budget to a whopping Rs 12.5 lakh crore for FY27, a significant leap from the approximately Rs 11 lakh crore maintained for the past two years. But here's where it gets controversial: will this increase be enough to truly stimulate growth, and where should this money be targeted for maximum impact?
This potential increase in capex is being considered as a counter-cyclical measure. Think of it like this: when the global economy faces headwinds – like potential tariff wars initiated by the United States – exports and private investments can suffer, impacting overall growth. To offset these negative effects, the government might step in with increased spending to stimulate domestic economic activity. It's like giving the economy a shot in the arm when it needs it most.
Even with this substantial increase, the government aims to keep the capex-to-GDP ratio around 3%. This is considered a sweet spot – fiscally responsible, preventing excessive debt, while still allowing for the creation of valuable assets like roads, bridges, and other essential infrastructure.
From a public finance perspective, a 3% capex ratio is seen as optimal, similar to the original Fiscal Responsibility and Budget Management (FRBM) Act's target of a 3% fiscal deficit. In FY26, capital expenditure is estimated at approximately 3.14% of GDP. With an anticipated nominal growth of around 10% in FY27, the capex outlay could translate to about 3.18% of GDP, calculated against the advance estimate of Rs 357.14 lakh crore for FY26.
Government officials suggest that this increase in FY27 is highly probable after two years of maintaining the status quo. One official stated, "The capex target hasn't changed in the previous two budgets, and the offtake in the current year has been very strong. So, there could be a 10–15% increase in capex outlay in FY27."
A crucial area likely to receive a significant portion of this incremental outlay is the Centre's Scheme for Special Assistance to States for Capital Investment (SASCI). This program provides states with 50-year interest-free loans for capital spending. Introduced in FY21 to revive growth after the pandemic, SASCI has become a cornerstone of the Centre's investment strategy, especially given uneven private capex and fiscal constraints faced by many states. Notably, the budgeted outlay for this scheme has been held at Rs 1.5 lakh crore for the past two years, prompting repeated calls from states for an increase. Is this the right approach, or should the central government focus on its own infrastructure projects?
Given these demands, the government is expected to allocate a substantial portion of the FY27 capex increase to expanding this loan program. Officials hint that any increase might be linked to reforms aimed at improving the ease of doing business and accelerating nationally important projects. This could mean that states that are more efficient and business-friendly will receive more funding.
Economists largely agree with this assessment. ICRA chief economist Aditi Nayar anticipates the government will first raise FY26 gross capex by approximately Rs 20,000-30,000 billion to roughly Rs 11.5 lakh crore from the budget estimate of Rs 11.2 lakh crore. "Thereafter, the GoI is likely to peg the gross capex at around Rs 13.1 lakh crore in the FY27 BE, implying a 14% growth on the enhanced base," she stated. Nayar believes most of the increase in FY27 will stem from a higher outlay for the capex loan scheme for states.
Nayar also emphasizes that the scheme's design allows spending on areas under state jurisdiction, while the Centre's own capital outlay is typically focused on sectors like roads, railways, and defense. This flexibility makes the state loan program a more effective tool for broad-based infrastructure creation across different regions. And this is the part most people miss: by empowering states, the central government can indirectly influence a wider range of development projects.
Madras School of Economics Director N.R. Bhanumurthy also advocates for a higher allocation to the SASCI scheme. "There are many states that may be willing to borrow more compared to this year," he said, adding that better-performing states are likely to meet the reform conditions attached to the program. This highlights the potential for a performance-based incentive system, rewarding states that are efficient and effective in utilizing the funds.
Bank of Baroda chief economist Madan Sabnavis projects that FY27 capex could be 5–10% higher than the revised estimate for FY26. While he agrees that an increase in capex loans to states would be beneficial, he cautions that the actual allocation size will depend on how effectively states have utilized the funds in FY26. This raises a crucial question: how can we ensure that these funds are used efficiently and effectively, avoiding waste and corruption?
India Ratings chief economist Devendra Kumar Pant anticipates that the Union government's capex outlay, including loans to states, will remain close to 3% of GDP in FY27. Emphasizing the role of states in driving infrastructure investment, Pant notes that the multiplier effect from state-level capex is higher than that of the Centre. "We expect the central government to continue to maintain the pace of loans to states for capex," he said. This suggests that investments made at the state level have a greater impact on economic growth than those made by the central government alone.
Including Grants in Aid of Rs 4.27 lakh crore for the creation of Capital Assets, the Centre's capex was estimated to be Rs 15.48 lakh crore or 4.3% of GDP in FY26.
So, what do you think? Is increasing the capex budget to Rs 12.5 lakh crore the right move for India's economy? Should the government focus on direct investment in national projects or prioritize lending to states? And how can we ensure that these funds are used effectively and efficiently? Share your thoughts and opinions in the comments below!
