There are many ways of evaluating the rise in the Union government’s capital expenditure over the last few years. Such an evaluation has become important because the current financial year has seen a significant trend change. The Union government’s capital expenditure in 2025-26 will grow by just 4.2 per cent, compared to high double-digit growth that was recorded in each of the previous five years. Even the effective capital expenditure, which includes grants in aid for creating capital assets, will grow by less than 6 per cent this year, according to the Budget presented earlier this month.
A deceleration of this extent in the Union government’s capital expenditure is quite stark, particularly when compared with the unusually large annual increases in the last five years. Note that such a rate of increase was a significant improvement over what happened in the first six years after the Narendra Modi government was formed in May 2014.
Indeed, between 2014-15 and 2019-20, the government’s capital expenditure grew in double digits in only three years (the highest being 29 per cent in 2015-16). Two of these years saw only a single-digit increase and in one year —in 2017-18 — capital expenditure actually declined by 7.5 per cent. Unsurprisingly, as a percentage of gross domestic product (GDP), capital expenditure during this period of 2014-2020 hovered between 1.5 per cent and 1.8 per cent.
Importantly, the economic reforms of the 1990s were accompanied by a strong dose of capital expenditure. In most years during the 1990s, capital expenditure stayed elevated at well over 3 per cent of GDP. There was a gradual decline from 1999-2000, barring some occasional bursts between 2003 and 2005. Remarkably, between 2005 and 2020, a period of 15 years, capital expenditure crossed 2 per cent of GDP only twice — in 2007-08 and in 2010-11.
Thus, what Finance Minister Nirmala Sitharaman achieved on the capital expenditure front after Covid is creditable. Between 2020-21 and 2024-25, she grew capex by 26 per cent on average every year. Of course, this became necessary in the post-Covid years, with the private sector’s ability to invest severely eroded and the government deciding to use its fiscal muscle to boost investment in infrastructure creation. Nevertheless, this is a record that remains unequalled by any other finance minister in the last many decades. As a percentage of GDP, capital expenditure rose from 1.67 per cent in 2019-20 to 3.2 per cent in 2024-25.
That is also why a slowing of the annual increase in capital expenditure to just 4.2 per cent in 2025-26 is likely to attract a lot of attention. As a percentage of GDP, the Union government’s capex will decline for the first time since Covid to 3.07 per cent.
Is this a cause for concern? Remember that government capex was increased in a bid to crowd in private investment, which was growing at a very slow pace. But the first half of the current financial year has reported a welcome change in the private corporate investment cycle. Listed companies other than those in the financial sector (an estimated 700 top companies) have reported a 13 per cent increase in their fixed assets during the April-September 2025 period. This expansion was the fastest in six years.
It would appear that years of waiting for a revival in private corporate investment is coming to an end, potentially yielding positive results for the economy. The government, however, does not seem to be taking chances or relaxing on the basis of the revival in private corporate investment this year. For the coming year, therefore, there is a promise that the government’s capex will grow again in double digit at 11.5 per cent and as a percentage of GDP, it will go up marginally to 3.11 per cent. Clearly, having lost some momentum in 2025-26, and partially enthused by a revival in private investment, the government is planning to boost capex once again.
Another way of assessing the Union government’s capital expenditure programme will be to examine the pattern in which loans to states are granted to help them finance their capital expenditure. Once again, Covid turns out to be an important marker. Interest-free 50-year loans to states, tied to the execution of their infrastructure projects, made their debut in 2020-21. That year, loans to states accounted for only 2.8 per cent of the total capex outlay of the Centre. Over the years, this share has gone up and, in 2025-26, it was 13 per cent and is set to go up to 15 per cent in 2026-27. What this shows is how effectively the Centre has used the states’ capacity to boost its overall capital expenditure programme.
It is possible that some states may be using these loans to manage their own finances. But the net gain is for the economy in general, as the loans are given only after the states commit to fulfilling a set of reforms, and the country’s overall capex pace continues unabated.
There is a third way of evaluating the rise in the Union government’s capital expenditure in the last few years. The role that central public sector undertakings (PSUs) play in helping the Union government meet its capex plan is not often adequately recognised. Almost 41 to 52 per cent of the government’s capital outlay is allocated to PSUs. In other words, the Union government depends not just on the states for executing its capex plan, but also on PSUs. What’s more, PSUs are also increasingly becoming more dependent on the budgetary support from the Centre, which is released through equity and loans to help them execute their capital outlay plans.
While this raises questions over the ability of PSUs to raise internal resources to meet their capital outlay, the Centre too should think hard on its currently stalled privatsation programme. If almost half of the government’s capex is dependent on providing equity and loans to PSUs, executing a robust privatisation plan could further complicate its capacity to absorb capital expenditure. The larger point is that it is not just revenue expenditure, where the government has exposed its inability to spend as much as it proposes in a year, even with regard to its capital expenditure, similar troubling questions could arise and become a subject of debate and discussion.
In 2025-26, the government will not be able to spend more than 75 per cent of its budgeted allocation for over 50 schemes, each having an annual outlay of over Rs 500 crore. So far, such problems of underspending do not trouble its capital expenditure in the same way. But there is little doubt that a more comprehensive system is needed to ensure effective expenditure monitoring, so that very little of the money allocated for a scheme is returned to the exchequer at the end of the year.
AK Bhattacharya is the Editorial Director, Business Standard. He tweets @AshokAkaybee. Views are personal.