Union Budget should boost public capex, contain borrowing costs

India’s GDP growth was aided by sizeable monetary easing in the form of policy rate cuts and liquidity support, aiding the flow of credit and supporting consumption. The central government also chipped in on the fiscal front, with personal income tax relief and GST rate cuts across a large number of items.

A buoyant domestic economy, coupled with a strong government push for infrastructure development, and reasonably high-capacity utilisation in many sectors offered a favourable backdrop for Indian companies to undertake sustained capital expenditure (capex). However, a broad-based pick up remained elusive, amid heightened global uncertainty and weak merchandise export growth. This reflects a continuation of the scenario seen in the post-covid period, and has led to corporates strategically focusing on value addition, while upgrading and modernising their capabilities.

Listed entities have ramped up the pace of investments. Capex of a sample of 1,600 non-financial entities has grown at a 10-year CAGR of about 9% (in nominal terms), and after a pandemic-induced pause, investment rebounded sharply. Cumulative capex during FY2023–FY2025 surged nearly 60% over the three years preceding covid (FY2018–FY2020).

Corporate balance sheets have strengthened significantly over the past decade. The total debt-to-OPBDITA (operating profit before depreciation, interest, tax, and amortization) ratio improved to 2.1x in March 2025, from 3.4x in March 2016. Liquidity buffers have strengthened too—cash and current investments now account for 46% of total debt, up from 32% a decade ago. In fact, cash reserves have averaged nearly twice the annual capex, giving companies flexibility to scale up without financial strain.

On the financing side, banks are well-capitalised and gross non-performing assets (NPAs) are at historic lows, making them well-positioned to support the next leg of the domestic investment cycle. Bond markets will continue to complement bank lending, though their depth remains limited to highly rated issuers.

Given this backdrop, the upcoming Budget for FY27 should double down on its support for public capex, which would be key to push up the country’s capital stock and potential growth. A double-digit hike in the capex target for the next fiscal would ensure support for GDP growth, partly offsetting the likely weakness in corporate capex.

More importantly, the government must widen the scope of its capex. A substantial portion of its capital spending is currently focused on railways, highways and roads, and defence, which have seen sizeable expansions in the post-covid period, albeit partly aided by ‘on-budgeting’ of capex in some cases. The next wave of public capex needs to be more local in nature, covering issues such as water supply, sanitation, public transport, irrigation, healthcare and education.

However, many of these issues largely fall under the ambit of state governments. The central government could provide an immediate impetus to these segments via a sizeable expansion in the scheme for special assistance to states for capital investment, which was pegged at ₹1.5 trillion in FY26. Under this scheme, the Centre provides 50-year interest free loans to state governments for the purpose of capex.

The Budget must also materially enhance outlays for incentive disbursements under the production-linked incentive (PLI) schemes. These schemes have met with limited success so far, partly on account of operational delays (such as regulatory, infrastructure, and supply chain-related) as well as delays in receiving incentives in some cases. However, capex has picked up across some sectors under the PLI schemes, and production is likely to gather pace. Doubling down on resolving sectoral issues could boost India’s manufacturing growth in the near term.

Finally, the government must also ensure that borrowing costs in the economy remain contained, by limiting its fiscal deficit and market borrowings in FY27. This would be crucial to avoid ‘crowding out’ the private sector.

Icra’s assessment suggests that the Centre is likely to set a fiscal deficit target of 4.3% of GDP in FY27, marginally lower than the 4.4% estimated in FY26. While this would contain net market borrowings, the gross market borrowings would still rise materially owing to a sharp increase in redemptions. The Centre needs to ensure that the extent of the increase is contained in order to comfort bond markets, especially with yields on government securities remaining sticky over the past few months despite continued monetary easing and liquidity support.

Ramnath Krishnan is managing director and group CEO, Icra.