Central government capex hits all-time high, what does it mean?

In FY25, India’s combined capital spending by the Centre, states, and public sector companies reached an all-time high of 5.3% of GDP. The central government alone spent 3.2% of GDP, the highest in over two decades. This shift shows a clear move toward building long-term assets-roads, railways, power infrastructure-rather than spending heavily on short-term subsidies.

Surpassed FY25 estimates

The Centre’s capex touched ₹10.5 trillion in FY25 (up 10.8% YoY), exceeding its revised estimate of ₹10.2 trillion. While the first half saw a 15.4% YoY dip due to election-related delays, spending surged 39% YoY in the second half, driven by a strong infrastructure push.

Capex in March-25 was more than entire FY15/16

What’s interesting is that most of this push came in the Q4FY25, which saw the highest ever capex done during any quarter, especially capex in March 2025, when spending hit a record ₹2.4 lakh crore - more than what the government spent in the entire year of FY15 (₹1.7 lakh crore) or FY16 (₹2.3 lakh crore).

This sharp rise was supported by:

• Lower subsidy bills due to falling global prices across commodities, including crude oil.

• A strategic decision to boost investment-led growth in H2FY25 to overcome the election-led slowdown in capex spend in H1FY25.

• RBI dividend amounting ₹2.7 lakh crore gave the Central Government leeway to spend almost ₹0.8 trillion more for FY26. If the full amount is used for capex, the total capex would rise to ₹12.0 trillion from the budgeted₹ 11.2 trillion, raising its growth to 14.2%, compared to 6.6% currently.

Where is the money going?

A major share of the Centre’s capital spending continues to go into transport infrastructure, especially roads and railways.

• ₹2.8 lakh crore went to the infrastructure (roads and highways)

• ₹2.5 lakh crore to the railways for improving logistics infrastructure in India and increasing overall connectivity

• ₹1.7 lakh crore to the defence for pushing local manufacturing

Together, these three accounted for 67% of total capex in FY25.

Over the last five years, capex on roads has grown by 21% per year, and railway investment has gone up by 29% per year. These numbers reflect the government’s focus on improving connectivity and logistics.

Capex contribution by sector

Source: Budget documents, CEIC, Controller General of Accounts of India

How are states spending?

States’ capital spending hit an eight-year high of 3% of GDP in FY25, reflecting strong infrastructure momentum. Based on provisional data from 20 states, capex grew 22% YoY in FY25 - the fastest in three years. For FY26, states have budgeted a 14.9% YoY increase.

This consistent rise in state-level spending signals a broad-based public investment push across the economy. However, state-level spending has been slower than the Centre’s, partly due to elections and fiscal limits.

Among states, Uttar Pradesh led the capital spending pack in FY25, accounting for 15.8% of total state capex. It was followed by Maharashtra (11%), Gujarat (7.4%), Madhya Pradesh (6.8%), and Tamil Nadu (5.9%).

Notably, nine states-including Maharashtra, UP, Assam, Rajasthan, Chhattisgarh, Punjab, Gujarat, Himachal Pradesh, and Odisha-expanded their share of total capex compared to FY24, while the remaining 11 states saw a decline in their contribution.

Why this matters

The strong capex push is important for several reasons:

• It fills the gap while private companies are still cautious about investing.
• It improves infrastructure, making India more efficient and competitive.
• It creates jobs, especially in sectors like construction and manufacturing.

Capex is important because it has a higher multiplier effect-every ₹1 spent adds about ₹2.45 to GDP over time. It also helps pull in private investment and builds long-term productive capacity. If this momentum continues-and project execution improves-India could see long-term benefits in both economic growth and quality of life.

What to expect in FY26?

As we move into FY26, here’s what the outlook looks like:

• Capex push will continue, but focus will now shift toward better project execution, asset monetisation, and efficiency.

• In April 2025 alone, the Centre spent ₹1.6 lakh crore, which is 14.3% of the year’s target - a strong start.

• Sectors like roads, railways, power, renewables, and defence will remain the focus.

• The government may also invest in new areas such as EV charging stations, port-linked logistics hubs, and green hydrogen projects.

• States are likely to increase spending with better fiscal space and more central support.

• Private companies are also expected to slowly increase investments in chemicals, cement, auto parts, and data centres, as capacity utilization improves.

Insight for investors : Capex-led growth with fiscal room intact

• Capex without fiscal stress: The government’s fiscal deficit is projected to drop below 4.5% of GDP in FY26, falling under its long-term average. This gives policymakers the comfort to continue aggressive capital spending without endangering macro stability.

• E&C order books at record highs: India’s top engineering-construction and defence companies now hold a record $213 billion in order book, with 23% YoY growth to give revenue visibility and expected to drive earnings momentum going forward.