India’s ambitious capital expenditure (capex) strategy — seen as a cornerstone of its economic growth model in recent years — is showing signs of strain.
For the fiscal year ending March 2025, government spending on infrastructure and long-term investments is expected to fall short of its ₹11.11 trillion target, and will possibly be capped at around ₹10 trillion. This shortfall raises concerns about the sustainability of the capex-driven growth model.
The largest slice of the capex pie — roads — has encountered significant hurdles. Of the ₹2.72 trillion budgeted, only ₹1.47 trillion had been spent by November, trailing last year’s breezy pace. The National Highways Authority of India’s (NHAI) decision to prepay ₹56,000 crore in loans has diverted resources, slowing road construction and raising concerns about the broader economic impact.
Railways, allocated ₹2.52 trillion, showed slightly better progress, with ₹1.68 trillion spent by November. However, inefficiencies in capital allocation have muted its overall contribution to economic growth.
Defence capex, budgeted at ₹1.72 trillion, has also misfired. By November, only 41 per cent of the allocation had been utilised, reflecting delays and episodic spending patterns.
State loans, a critical element of the capex framework, have seen sluggish disbursements. Of ₹1.62 trillion allocated for interest-free loans to states, only 43.2 per cent had been released by November.
The Department of Economic Affairs has utilised just 4.5 per cent of its ₹66,197 crore capex allocation, exposing inefficiencies in rolling out new schemes. Meanwhile, the government’s reduced funding for BSNL signals a cautious approach toward capital infusion in loss-making public enterprises, Subhash Chandra Garg, former finance & economic affairs secretary, has said.
This underperformance in capex spending comes as the government appears to recalibrate its fiscal priorities. Analysts suggest a pivot towards welfare spending and transfer payments in the run-up to national elections.
A Goldman Sachs Economics Research report highlights robust tax collections, offering some fiscal space for increased current expenditures. However, the report warns that capex, which peaked at 3.2 per cent of GDP in FY24, may decline as fiscal consolidation gains priority. .
N.R. Bhanumurthy, director at the Madras School of Economics, recommends scaling back capex to 3 per cent of GDP.