Budget 2026: Capex Boosted to ₹12.2 Lakh Crore for FY27

Introduction

Finance Minister Nirmala Sitharaman, presenting the Union Budget for 2026-27, announced a significant increase in capital expenditure (capex) to ₹12.2 lakh crore. This allocation marks a nearly 9% rise from the previous fiscal year and signals the government's continued reliance on public investment to drive economic growth and infrastructure development. The move is aimed at maintaining the momentum of public spending to build long-term assets and create a supportive environment for private investment to recover.

A Sustained Push for Public Investment

The FY27 budget continues a multi-year trend of elevated public capital spending. The allocation of ₹12.2 lakh crore is a substantial step up from the ₹11.21 lakh crore earmarked for the fiscal year 2025-26. This sustained increase highlights a strategic policy choice to use government funds to build foundational infrastructure. In her budget speech, the Finance Minister drew attention to the remarkable growth in public capex over the past decade, which has surged from just ₹2 lakh crore in 2014-15. This consistent focus underscores the government's strategy of using infrastructure as a primary lever for economic expansion, especially at a time when private sector capital formation has remained uneven.

The Rationale Behind Higher Capex

The government's decision to further increase capital expenditure is rooted in its potential to generate a strong multiplier effect on the economy. Public spending on assets like roads, railways, ports, and power projects directly creates jobs in the construction and manufacturing sectors. More importantly, it improves logistical efficiency, reduces business costs, and enhances overall productivity, thereby laying the groundwork for sustainable long-term growth. The Finance Minister stated that the higher allocation is intended to "continue the momentum," ensuring that the progress made in infrastructure development over the last few years is not just maintained but accelerated. This approach is consistent with recommendations from the Economic Survey, which argued that capex delivers more durable benefits to household incomes and living standards than direct revenue spending.

Addressing the Private Investment Gap

A key objective of the government's capex push is to stimulate, or "crowd in," private investment. While public spending has been robust, private sector capex has been muted and concentrated in only a few sectors. The government is betting that by creating modern infrastructure and signaling a stable policy environment, it can de-risk projects and make them more attractive for private companies. The Economic Survey had previously cautioned that policy and regulatory uncertainty can significantly dampen private capital formation. The sustained public investment is a clear signal of the government's commitment, which is expected to boost business confidence and encourage private players to commit their own capital.

New Measures to Boost Confidence

Recognizing that financial risk is a major deterrent for private developers, the budget introduced a key new proposal: the establishment of an infrastructure risk guarantee fund. This fund is designed to mitigate risks during the challenging development and construction phases of a project. By providing prudentially calibrated partial credit guarantees to lenders, the fund aims to lower the risk perception associated with large-scale infrastructure projects. This, in turn, should make it easier for private developers to secure financing. In addition to this financial backstop, the government also reiterated its focus on developing infrastructure in tier-2 and tier-3 cities with populations exceeding five lakh, identifying them as emerging centers of economic growth.

A Multi-pronged Infrastructure Strategy

The budget's infrastructure focus extends beyond the headline capex number. Finance Minister Sitharaman announced several specific initiatives that complement the overall spending plan. A notable proposal is the plan to support mineral-rich states like Odisha, Kerala, Andhra Pradesh, and Tamil Nadu in setting up dedicated rare earth corridors. This strategic move aims to build a domestic supply chain for critical minerals used in electric vehicles, renewable energy equipment, and electronics, thereby reducing import dependence. Other key projects announced include a new dedicated freight corridor from Dankuni to Surat, the operationalization of 20 new national waterways, and a ₹10,000 crore growth fund to empower MSMEs, all of which are designed to improve connectivity and support industrial growth.

Historical Capex Allocation

The following table illustrates the significant growth in the government's capital expenditure over the years, reflecting its strategic priority.

Market Impact and Analysis

The increased capex allocation is expected to have a positive impact on several key sectors of the economy. Companies in the infrastructure, construction, cement, steel, and capital goods industries are direct beneficiaries of increased government spending on projects. The sustained demand from public projects provides revenue visibility and encourages these sectors to expand capacity. The announcement of rare earth corridors is particularly significant for the electronics and electric vehicle manufacturing ecosystems, aligning with the government's 'Make in India' initiative. For the broader market, the budget signals policy continuity and a commitment to growth, which is likely to be viewed favorably by investors.

Conclusion

The Union Budget 2026-27's allocation of ₹12.2 lakh crore for capital expenditure reinforces the government's unwavering focus on an investment-led growth model. By continuing to fund the creation of long-term assets, the government aims to not only support the economy in the short term but also enhance its long-term productive capacity. The success of this strategy will now depend on the efficient and timely execution of these ambitious infrastructure projects and on its ability to successfully catalyze the much-needed revival in private sector investment.