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India’s capex story shall remain subdued unless the state governments get their acts right and invest at minimum an equal amount on capex as is proposed by the central government
The Union Budget 2025-26 aims to strengthen India’s healthcare sector. (File)
In Part II of this three-part budget story, I explained how, for the first time in history, the government of India’s budget for the financial year 2025-26 clocked a budgetary outlay exceeding Rs 50 lakh crore – to be precise, at Rs 50,65,345 crore – out of which the total capital expenditure was pegged at Rs 11,21,090 crore. If we also add Rs 427,192 crore in grants-in-aid to state governments for the creation of capital assets, the effective budgeted capital expenditure stands at Rs 15,48,282 crore.
Dissecting the Outlay
In the third and final piece on the budget, I dissect the budgetary outlay and the past performance of key sectors with a special focus on the absorption of the capital outlay. As it is difficult to analyse the story of all sectors and ministries, at a minimum, apart from the sectors that consume the maximum capex, I would try to tell the story of sectors where the capex must be upped substantively to make India the Viksit Bharat.
Wake Up Time
If India must become Viksit Bharat, it must raise its capex profile to the level of China. Nonetheless, merely the central government cannot do the heavy lifting in this space. With Rs 427,192 crore in grants-in-aid to state governments for the creation of capital assets and an additional outlay of Rs 1.5 lakh crore proposed to them for 50-year interest-free loans for capital expenditure and incentives for reforms, it is wake-up time for the state governments.
India’s capex story shall remain subdued unless the state governments get their acts right and invest at minimum an equal amount on capex as is proposed by the central government.
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Time for Private Sector to Chip In
For the last eleven years, the central government has been increasing the capex outlay every year to take the country to the next level. However, during this period, while the performance of the state governments has been patchy, the private sector has been in a deep slumber. This year’s budget makes special reference to the creation of infrastructure through the renewed focus on PPP through the following three specific measures:
1. Public-Private Partnership (PPP): The budget mandates that each infrastructure-related ministry will come up with a 3-year pipeline of projects that can be implemented in PPP mode. It also states that states will also be encouraged to do the same and that states can seek the support of the India Infrastructure Project Development Fund (IIPDF) to prepare PPP proposals.
2. Asset Monetisation: Building on the success of the first Asset Monetisation Plan announced in 2021, the budget has announced the launching of the second Asset Monetisation Plan for 2025-30, which will be launched to plough back capital of Rs 10 lakh crore into new projects.
3. Urban Rejuvenation: The budget has announced the setting up of an Urban Challenge Fund of Rs 1 lakh crore to implement the proposals for ‘Cities as Growth Hubs’, ‘Creative Redevelopment of Cities’ and ‘Water and Sanitation’ announced in the July Budget. As per the budget, the fund will finance up to 25 per cent of the cost of bankable projects, with the stipulation that at least 50% of the cost is funded by PPP, bonds and bank loans.
Reimagining PPP
If India must become Viksit, the above is par for the course and must get embedded in the “India growth story”. But there is a caveat: the experience of Bharat in developing infrastructure through PPP is not one of happy endings. It often degenerated into “crony capitalism”, padding up project costs and leaving sizable holes in the balance sheets of the financing banks. Nonetheless, to expedite infrastructure development, PPP must play its designated role. And if that be the case, there is a strong case for reimagining PPP architecture, project configuration, project implementation and regulation.
The Capex Goes To
According to the Economic Survey, released a day before the Budget, until November 2024, just three sectors – Defence, Railways and Road Transport – accounted for about 75 per cent of the total capital expenditure. While defence is a totally inescapable expenditure, rail and road accounting for close to fifty per cent of the capex over more than the past decade begs a question: whither capex on other core sectors and social infrastructure, without which India’s growth story shall remain pyrrhic?
Here is the story of three sectors that account for seventy-five per cent of the total capex:
1. Defence: The financial year 2025-26 budget for the Ministry of Defence has been enhanced to Rs 6.81 lakh crore. It represents a 9.5% increase from the Rs 6.2 lakh crore allocated in the financial year 2024-25. While the revenue expenditure – Rs 3.11 lakh crore – accounts for the biggest portion, the outlay for defence pensions is pegged at Rs 1.6 lakh crore, a 13.5% increase.
The total outlay for the defence sector stands at 13.45% of the union budget outlay.
Nonetheless, there is a red flag when it comes to the allocation towards capex for the modernisation of the defence forces. The capex budget, at Rs 1,80,000 crore, accounts for 26.43 per cent of the total, out of which Rs 1,48,722.80 crore is allocated for capital acquisition, referred to as the modernisation budget of the armed forces, while the remaining Rs 31,277.20 crore is earmarked as capital expenditure on research and development and the creation of infrastructural assets across the country.
The above raises an existential question: is the Rs 1,80,000 crore (Rs. 1,72,000 in 2024-25) allocation sufficient to substantively enhance the firepower of the armed forces and modernise them, given the uncertain and worsening geopolitical uncertainties? It must be noted here that, as a percentage of GDP, the defence capex budget remains below two per cent.
2. Roads and Highways: The allocation in the financial year 2025-26 for roads and highways, at Rs 2.72 lakh crore, remains unchanged from that of 2024-25. I call it the correct path to choose for the following reasons:
- For the past eleven years, the roads and highway sector has been the biggest beneficiary of the union budget, with a total budgetary outlay next only to defence.
- Apart from central government investment, the road and highway sector also gets the biggest outlay in the state government budgets.
- It is possible to push imaginative PPP in roads and highways.
- The pendulum has swung too far in the direction of disproportionate investment in roads and highways, whereas the country needs symbiotic growth of all major transport sectors
3. Railways: The Ministry of Railways’ capital budget allocation in 2025-26 stands at Rs 2.65 lakh crore and remains unchanged from 2024-25. Out of the total Rs 2.65 lakh crore, Rs 2.52 lakh crore is from general revenue, Rs 500 crore comes from the Nirbhaya fund, Rs 3,000 crore from internal resources, and Rs 10,000 crore from extra-budgetary resources.
The railway capex saga makes me ask a fundamental question: where is the capital expenditure going, how well is it being spent and why, even after increasing capex over the past eleven years, is the financial performance of Indian Railways not improving?
If I look at only five years of railway capex (2021-22 to 2025-26), it stands at Rs 10.38 lakh crore, which is more than the revised capex budget of Rs 10.18 lakh crore of the government of India for 2024-25.
The railway story requires a separate piece on its own, but prima facie it looks like good money going after bad. Despite all the investment, financial performance has reached a nadir, with Indian Railways appearing to have entered a terminal coma, as its effective operating ratio has crossed 100% – it means that IR is spending more than 100 paisa to earn 1 rupee.
Whither Capex in Other Sectors
With seventy-five per cent of the capex already accounted for by defence, roads and highways, and railways, the key takeaway regarding the allocation to other sectors is clear: semantics apart, there is insufficient money available with the government for the remaining sectors
To make Bharat Viksit, come what may, the story of the following sectors must see a radical transformation:
1. Aviation: Because in the next fifteen years the country is set to emerge as the largest domestic aviation market, Rs 2,400 crore allocation to the sector does not do justice to the opportunities and challenges ahead.
2. Port, Shipping and Inland Waterways: While India setting up a 250-billion-rupee ($2.9-billion) maritime development fund for the long-term financing of the country’s shipbuilding and repair industry is a welcome move, if India has to truly become an exporting nation, it is time to learn from the story of Chinese ports, which have become the leading ports in the world, handling the largest volume of container traffic and serving as a major gateway for global trade due to their advanced infrastructure.
3. Urban Development: Overall, the Union Ministry of Housing and Urban Affairs saw a significant increase in allocation, at Rs 96,777 crore, up from the 2024-25 BE of Rs 82,576.57 crore and RE of Rs 63,669.9 crore. However, it must be remembered that by 2047, fifty per cent of Bharatiyas shall be living in cities and towns. Even as of today, urban India is not liveable. Neither this incremental budget increase nor the Rs 1 lakh crore Urban Challenge Fund is going to make a substantive difference. Also, though 70 of the top 100 most polluted cities in the world are in India, the budget does not show a pathway to mitigate urban pollution.
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4. Education: Barring the announcements of fifty thousand Atal Tinkering Labs, broadband in government secondary schools and infrastructure development in IITs, what does the education budget really provide to make India Viksit? The total budget allocation for the Ministry of Education has reached Rs 128,650 crore, marking a 6.22% increase over the Budget Estimate (BE) of 2024-25. Avowedly, this increased investment aims to strengthen school education, higher education, skill development, and research to enhance India’s human capital.
It must be noted here that even in 2025 India is nowhere even remotely close to the 1966 dream of the Kothari Commission, which recommended that a minimum of 6% of GDP be spent on education.
5. Health: The Union Budget 2025-26 aims to strengthen India’s healthcare sector with investments in medical education, digital health, and preventive care. Also, the budget has announced an increase in the total outlay for the ministry to Rs 95,957.8 crore from the previous year’s revised estimate of Rs 86,582.5 crore. The Finance Minister has also announced cancer day-care in all district hospitals and medical insurance for one crore gig workers through Ayushman Bharat, apart from the announcement of 10,000 extra seats in medical colleges.
But if Viksit Bharat has also to be Healthy Bharat, the country must not only substantially increase the health budget as compared to GDP, or else the persistently high out-of-pocket expenses shall continue to drive Bharatiyas to penury.
To Sum Up
To end the series, my final analysis remains that the budget provides the right nostrums to make Bharat Viksit and is directionally correct, but after a decade of overspending on rail and road, it is time to reboot the economy and up the ante with a substantially higher outlay in so far neglected sectors, including the social sectors.
