New Delhi’s aggressive fiscal adjustments have triggered a sharp 23.4% year-on-year decline in India’s capital expenditure during the third quarter of fiscal year 2025-26. This revelation from ICRA’s latest report underscores potential headwinds for economic momentum, even as state-level spending and festive demand provide some counterbalance.
Government spending curbs lie at the heart of this downturn. Central outlays contracted significantly, tempering the pace of infrastructure-led growth that has powered India’s recent expansion. Analysts note that while this moderation follows a robust 16.7% surge in the prior quarter, it signals a return to normalized levels after earlier accelerations.
Bright spots emerged from the states. Data from 24 states reveal a 21.9% jump in combined capital spending and net lending, rebounding from the previous quarter’s dip. Their aggregate capex climbed from 1.8 lakh crore rupees in Q2 to 2.1 lakh crore in Q3—nearly matching central government levels.
Overall, combined central and state capex totaled 4.2 lakh crore rupees, a slight dip from 4.4 lakh crore a year ago. ICRA projects GDP growth easing to 7.2% for the quarter, down from 8.2% previously, yet comfortably above 7% buoyed by strong festival sales and GST efficiencies.
ICRA Chief Economist Aditi Nair highlighted challenges in the new base year GDP estimates. ‘Adverse base effects, subdued central capex, state revenue spending slowdowns, and weak merchandise exports are key drags,’ she explained.
On revenue fronts, central non-interest revenue expenditure fell a milder 3.5% year-on-year, improving from Q2’s 11.2% plunge. States saw a 2.7% rise, albeit slower than before. Combined, non-interest revenue spending edged up 0.3%, reversing Q2’s marginal decline.
This mixed fiscal picture sets the stage for policymakers to navigate growth sustaining measures amid global uncertainties. With states stepping up, India’s economic engine shows resilience, but sustained central push remains crucial for hitting long-term targets.