Budget 2026 Expectations: Capex to Pick Up on Improved Consumption and Capacity Utilisation

Capital expenditure is expected to gain momentum in FY27 as improving domestic demand, higher capacity utilisation and easing inflation strengthen the case for a sustained investment cycle, economists said, even as the government looks to maintain its focus on public spending in the upcoming Union Budget.

“Capacity utilisation is expected to improve further, especially in infrastructure,” Madan Sabnavis, chief economist at Bank of Baroda, said. “Owing to reforms in income tax and the Goods and Services Tax (GST) carried out in the previous Budget, the government may not need to do heavy lifting or go overboard on capex this time,” he added.

In the FY26 Budget, the Centre allocated direct capital expenditure of ₹11.21 lakh crore, or 3.1% of GDP, marking an increase of over 10% compared with the previous fiscal year.

According to media reports, private investment is also expected to accelerate due to a combination of government reforms, easing inflation and lower interest rates. Both the wholesale price index (WPI) and the consumer price index (CPI) have fallen to multi-year lows in October and November. The benign inflation trend has also created room for further rate cuts by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI).

The rate-setting panel cut the benchmark repo rate by a cumulative 125 basis points in 2025, bringing it down to 5.25% from 6.50% a year ago.

A report by The Economic Times said the upcoming Budget is expected to continue prioritising public capital expenditure, which could indirectly catalyse private investment. “Public capex has led to crowding-in of funds in the infrastructure sector, particularly benefiting steel and cement,” Sabnavis said.

“In the interim, government capital expenditure has been the key support to the capex cycle. This needs to be maintained to crowd in private investment,” Gaura Sengupta, chief economist at IDFC First Bank, said.

As per the report, fast-moving consumer goods (FMCG) and consumer durables are likely to see increased investment due to sustained domestic demand. Other reforms — including new labour codes, the replacement of MGNREGA with the VB-G RAM G rural employment guarantee scheme, insurance reforms, and the opening up of the nuclear sector to private and foreign participation — are also expected to support investment.

Central government capex rose 32% to ₹6.2 trillion in the April–October period from ₹4.7 trillion a year ago. However, gross fixed capital formation, a key investment indicator, slipped to 7.3% in the September quarter from 7.8% in the previous quarter.

Economists cautioned that a volatile geopolitical environment, a 50% US tariff, and the absence of a trade deal with Washington continue to cloud the export outlook and investment sentiment.

“Looking ahead, given persistently high capacity utilisation levels, improving domestic demand and significant monetary policy easing, we expect some improvement in private capex,” Sengupta said.