The small picture: Tracing the subtle trends behind India's capex growth

How should one assess the recently reported rise in the Union government’s capital expenditure? Has there really been a sharp uptick in such spending? Of course, the headline numbers, based on data released by the Controller General of Accounts, show that the Centre’s capital expenditure has jumped by over 43 per cent to ₹4.31 trillion in April-August 2025, compared to ₹3 trillion in the same period of 2024.

 

Unsurprisingly, this has been hailed as a major positive development that should help sustain and even enhance growth in the months to come, particularly when the private sector is still showing reluctance to increase investment in new projects. Remember that the government had for the first time in the last five years projected a single-digit growth in capex in 2025-26 to just 6.5 per cent. But the frontloading of capex in the first five months will now provide an expenditure cushion in the remaining seven months of the current year, when it can afford to contract by even about 8 per cent and yet meet the Budget target of ₹11.21 trillion.

 

In spite of that comfort, however, a closer look at these numbers reveals a mixed picture. Yes, after the Centre’s capex in July fell by over 10 per cent, bringing down the overall increase in such expenditure in the first four months of 2025-26 to 33 per cent, the sharp rise in August has improved the outlook. But when you analyse how the 43 per cent rise has been achieved, the enthusiasm shown by most analysts will have to be tempered a bit. Worries over the capacity of the infrastructure sector to absorb increased capital expenditure will not go away.

 

The Union government’s capital expenditure has two broad components. The first component is the capital support provided to central ministries and state-owned enterprises by way of equity infusion. The second component consists of loans and advances to various entities within the government system, including states. For 2025-26, the Centre’s capex plan is dependent a little more on loans and advances, which accounted for as much as 20 per cent of the total capex. In contrast, this share in 2024-25 was projected at 18 per cent. In 2021-22, when the current cycle of capex rise began, loans and advances had a share of only 9.9 per cent.

 

Two possible reasons could have caused the rise in the share of loans and advances in the Centre’s capex plan. One, it is relatively easy to release money by way of loans against schemes that could qualify as capital outlay. Execution of projects on the ground requires rigorous advance planning, failing which there are delays, leading to a decline in actual expenditure. Two, a large part of the loans is directed at states and is linked to their complying with a series of promised reforms. This also ensures that a higher capex plan expedites reforms in states and results in infrastructure development in different parts of the country, undertaken as part of the states’ initiatives, instead of only at the behest of the Centre.

 

This is exactly what happened in the first five months of 2025-26. The Centre’s capex by way of loans and advances rose by 175 per cent to ₹1.09 trillion this year, compared to about ₹40,000 crore in the same months of 2024-25. Clearly, it is the states and other entities that have benefitted from a higher capex. Not surprisingly, transfer of capex to the states has seen a 78 per cent increase in April-August 2025 to ₹51,509 crore. These loans and advances are largely linked to the execution of capital projects. But that may be a slightly complicated issue, which needs to be examined a little more closely.

 

Note that without these loans and advances, the rise in capex in the first five months has been about 23 per cent. This is still a handsome rise and should have a positive outcome for growth going forward.

 

But which sectors have significantly contributed to the rise in such expenditure? Not the railways, which saw a single-digit increase in capex at 8 per cent to ₹1.1 trillion. Even roads and highways saw an increase of 11 per cent to ₹1.17 trillion, while the housing and urban sector suffered a decline of over 4 per cent to ₹9,781 crore. Capital outlay on atomic energy also fell by over 6 per cent.

 

In the infrastructure space, the only sector that saw a sharp increase in capex was telecommunications, where the spend rose to ₹17,853 crore in these five months. Among other sectors which received higher capex during this period were defence, police, north-east development, space, science and technology. A reassuring development is that at least till August this year, the government did not have to use much of the capex parked with the department of economic affairs for meeting unforeseen or unplanned expenditure needs.

 

An intriguing number is the sharp rise in the capex for the department of food and public distribution. The capex for this department in the April-August period of 2025 rose to ₹50,000 crore, compared to ₹335 crore in the same months of 2024. In absolute terms, the increase for food and public distribution alone accounts for over a third of the  total rise in capex in these five months. It appears that this rise in the capex for this department is aimed at providing an advance to the Food Corporation of India (FCI), a state enterprise under the department of food and public distribution. FCI undertakes food procurement with the help of this support, obviating the need to borrow from banks for such requirements. This expenditure is adjusted against the subsidies that the government incurs on food distribution.

 

If this is the explanation, such an arrangement raises further questions on the quality of the government’s capital expenditure plan. In sum, the Centre’s overall capex growth continues to remain healthy, but the composition of this rise is what needs to be closely examined for a better understanding of how impactful it would be on growth.