A recent report by financial services firm Jefferies suggests that the government should raise capital expenditure (capex) by 10-12 per cent in the union budget 2025-26 to maintain its focus on infrastructure development and ensure confidence among stakeholders.
“10-12 per cent YoY capex growth in Feb budget, based on broadly maintaining capex to GDP ratio, is needed for confidence that government capex focus continues”.” the report stated.
Need for rise in capex
The report emphasised that sustained capex growth is vital for economic momentum, particularly in the transitional period following elections.
The FY26 Union Budget is expected to be closely scrutinised for signs of double-digit capex growth. Jefferies highlighted that the FY25 budget delivered a 16 per cent YoY rise in government capex as outlined in the interim budget, despite adjustments following the election results.
Capex FY25
While public sector enterprises (PSEs) saw a 16 per cent YoY increase in capex, surpassing the 13 per cent projected in the interim budget due to a 10 per cent upward revision in PSE spending, actual expenditure levels have lagged.
Government capex fell by 15 per cent YoY in the first seven months of FY25. To achieve even a modest 5 per cent growth for the fiscal year, a 32 per cent YoY surge in spending will be needed between November 2024 and March 2025.
The report attributed the slow execution of capex to the election year, noting that ministries typically take time to stabilise in such periods. However, it described this as a temporary issue rather than a structural inefficiency.
Regarding defence spending, Jefferies projected a 7-8 per cent compound annual growth rate (CAGR) from FY24 to FY30, consistent with trends over the past decade. The report highlighted domestic manufacturing, import substitution, and exports as key growth drivers, rather than substantial increases in government spending.
With current policies, the domestic defence sector is expected to generate opportunities worth $100-120 billion over the next 5-6 years, with a visible 13 per cent CAGR. If export opportunities are fully realised, this could rise to a 15 per cent CAGR, significantly benefiting domestic companies.