Why Did India’s Capex Contracts 23.4% in Q3?
Synopsis
India's capital expenditure saw a significant year-on-year decline of 23.4% in Q3 FY2025-26, primarily due to adjustments in government spending. While this slowdown may temper economic growth, state-level spending has shown improvement. Explore the factors influencing this trend and its implications for India's GDP growth.
Key Takeaways
Capital expenditure in India contracted by 23.4% in Q3 FY2025-26.
State governments recorded a 21.9% increase in capital outlay.
Combined capital spending reached Rs 4.2 trillion .
GDP growth is projected to moderate to 7.2% .
Non-interest revenue expenditure showed a 0.3% increase.
New Delhi, Feb 22 (NationPress) India's capital expenditure experienced a year-on-year decline of 23.4 percent in the third quarter of FY2025-26, according to a recent report released on Sunday.
The slowdown in government spending is likely to slightly dampen economic growth during this quarter, although overall economic activity continues to be buoyed by festive demand and state-level capital expenditure growth, as indicated by data compiled by ICRA.
On a positive note, state governments demonstrated enhanced activity. Data from 24 states indicated that their total capital outlay and net lending surged by 21.9 percent in Q3, reversing the contraction witnessed in the previous quarter.
In nominal terms, the capital expenditure of these states rose to Rs 2.1 trillion in Q3 from Rs 1.8 trillion in Q2, almost paralleling the capital spending levels of the Centre, as detailed in the report.
When combined, the capital expenditure from both Central and state sources reached Rs 4.2 trillion in Q3 FY2025-26, slightly lower than Rs 4.4 trillion recorded in the same quarter last year.
This marks a notable contrast to the robust 16.7 percent growth documented in Q2, suggesting a phase of normalization following earlier vigorous momentum.
ICRA has forecasted that India's GDP growth may moderate to 7.2 percent in Q3 FY2025-26, down from 8.2 percent in the preceding quarter.
Despite this moderation, growth is anticipated to remain above 7 percent, driven by strong festive demand and advantages from GST rationalization.
Aditi Nayar, Chief Economist and Head of Research & Outreach at ICRA, noted that estimating GDP growth under the new base year poses some challenges.
“Factors contributing to the anticipated sequential slowdown include an unfavorable base effect, reduced government capital spending, restrained state government revenue expenditure, and weak merchandise exports,” Nayar elaborated.
On the revenue front, the decline in the Centre's non-interest revenue expenditure has significantly slowed down.
This expenditure dropped by 3.5 percent year-on-year in Q3, compared to a sharper 11.2 percent contraction in Q2.
Meanwhile, the collective non-interest revenue expenditure of 24 states rose by 2.7 percent, albeit at a slower rate than the previous quarter.
Overall, the Centre and states recorded a modest 0.3 percent increase in non-interest revenue spending in Q3, contrasting with a slight decline in Q2.
Point of View
I believe it is essential to understand the nuances of India's capital expenditure trends. While the contraction poses challenges, the resilience of state-level spending reflects a dynamic economic environment. Our focus should remain on fostering growth and stability in the face of these fluctuations.
NationPress
9 May 2026
Frequently Asked Questions
What caused the 23.4% decline in capital expenditure?
The decline is attributed to a moderation in government spending, unfavorable base effects, reduced revenue expenditure from state governments, and weak merchandise exports.
How does state capital expenditure compare to the Centre's?
In Q3, state capital expenditure rose by 21.9% to Rs 2.1 trillion, nearly matching the Centre's spending levels.
What is the projected GDP growth for Q3 FY2025-26?
ICRA projects GDP growth to ease to 7.2% in Q3 FY2025-26, down from 8.2% in the previous quarter.
