India increases pressure on public investment as external risks mount

New Delhi: India is ramping up efforts to maintain capital expenditure (capex), which fuels growth, as the economy faces mounting external headwinds, including higher energy prices due to geopolitical tensions in West Asia and uncertainty over global trade.

The Union Finance Ministry has asked government ministries and departments to prioritize capital expenditure and ensure that their annual investment targets are met, two officials aware of the development said. The idea is to prevent economic activity from stagnating amid external headwinds by pulling all the levers on domestic growth and giving more time for private investment to take root, they said, requesting anonymity.

In meetings held last month to finalize the Revised Estimates (RE) for the current fiscal until March 2027, senior finance ministry officials urged their counterparts in other ministries and departments to keep a closer eye on project implementation and increase spending on capital projects in the remaining months of FY27, even as they prepare next year’s Union Budget proposals.

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“The signal was clear The Ministry of Finance will ensure capital expenditures even in times of increased need for subsidy expenditures. Some expenditure could be rejigged elsewhere but not in good capital projects,” said a senior government official who attended one of the meetings recently.

Inquiries emailed to the Treasury Department on Friday remained unanswered as of press time.

While the center’s investment expenses increased by 12.7% year-on-year. ₹6.55 trillion in the first half of the fiscal year, spending fell in both August and September after a jump in previous months. Investment will now have to grow by 16.2% in the second half (October-March) to meet the budgeted target for FY27. ₹12.2 trillion, the latest official data showed.

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At an HSBC event in Mumbai on November 2, Finance Minister Nirmala Sitharaman emphasized that the Center would maintain pressure on capital expenditure without compromising fiscal prudence. “Capex is a very important part of our growth strategy. Because by then the private sector will be able to expand capacity or invest capital, it is important for the government to come forward with capital investment.”

The government’s push for capital spending is critical as 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 quickly, spending on roads, railways, ports and electricity creates durable assets, generates jobs during construction, reduces logistics costs and helps spur private investment.

Every rupee spent on infrastructure is returned ₹2.5 to ₹3.5 for the economy in the medium term, according to the Economic Survey for 2025-26.

The center has substantially increased its capital spending over the past decade, and even more so in recent years, to quickly return the pandemic-hit economy to health. Its capital expenditure now stands at 3.1% of gross domestic product, up from 1.7% in pre-pandemic FY20. Its capital expenditure increased ₹2 trillion in FY15 on budget ₹12.2 trillion for 2026-27.

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The center’s investment growth slowed to just 2.8% in the July-September period from 23.7% in the first quarter (April-June), “which may affect GDP growth results,” Icra chief economist Aditi Nayar said.

After a stronger-than-expected 7.8% expansion in the June quarter, India’s growth is expected to slow to 7.35% in the September quarter, the economic affairs ministry said in its monthly outlook last week, citing its nowcasting model. Growth faces pressure from higher energy prices amid conflict in West Asia, although India’s economy remains resilient. According to forecasts by many global agencies, including the International Monetary Fund and the World Bank, India will grow by 7% or more in the current fiscal, maintaining its status as the world’s fastest growing major economy.

Increase in capital spending for states

To ensure that states also “accelerate capital expenditure”, apart from social security spending, the Center has handed over to them ₹2.18 trillion in the last week as part of his tax decentralization.

On October 31, the center issued another ₹1.09 trillion to the states as tax decentralization, over and above their regular monthly share. On Thursday, she postponed the November installment of the next one ₹1.09 trillion in five days, before Diwali.

Tax distribution particularly favors states that have been at the forefront of capital spending. 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 crores. Maharashtra received ₹7,022 crore and Tamil Nadu ₹4,466 million.

The center also has a budget ₹2 trillion in interest-free long-term loans to states for FY27 to support the creation of permanent public assets.

Meanwhile, capital expenditure by large central public sector enterprises and selected government entities reached 51% of the FY27 target. ₹8.43 trillion as growth-promoting investments remain the focus.