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India's Q3 Capex Drops 23.4% as Government Spending Adjusts

India's capital expenditure contracted by 23.4% year-on-year in the third quarter of FY2025-26, primarily due to an adjustment in central government spending. However, state governments showed robust momentum with their combined capital outlay rising by 21.9%, nearly matching the Centre's spending level. ICRA projects India's GDP growth will ease to 7.2% in Q3 from 8.2% in the previous quarter, citing factors like a contraction in government capex and weak exports. Despite the moderation, growth is expected to remain above 7%, supported by festive demand and GST rationalisation benefits.

Key Points: India's Capex Contracts 23.4% in Q3 FY26: ICRA Report

  • Central capex fell 23.4% in Q3
  • State capex rose 21.9% reversing prior contraction
  • Combined govt capex at Rs 4.2 trillion
  • GDP growth projected to ease to 7.2%
2 min read

India's capex contracts 23.4 pc in Q3 due to some adjustment in govt spending: ICRA

India's capital expenditure fell 23.4% YoY in Q3 FY26 due to adjusted govt spending, though state capex rose 21.9%. GDP growth may ease to 7.2%.

"The reasons for the estimated sequential slowdown include an unfavourable base effect, contraction in Government capital spending... - Aditi Nayar"

New Delhi, Feb 22

India's capital expenditure saw a year-on-year contraction of 23.4 per cent in the third quarter of FY2025-26, a new report said on Sunday.

The moderation in government spending is expected to slightly temper economic growth momentum during the quarter, although overall activity remains supported by festive demand and state-level capex expansion, data compiled by ICRA showed.

However, state governments showed improved momentum. Data available for 24 states showed that their combined capital outlay and net lending rose by 21.9 per cent in Q3, reversing a contraction seen in the previous quarter.

In absolute terms, the capex of these states increased to Rs 2.1 trillion in Q3 from Rs 1.8 trillion in Q2, almost matching the Centre's capital spending level, the report stated.

Overall, when combined, Central and state capital expenditure stood at Rs 4.2 trillion in Q3 FY2025-26, slightly lower than Rs 4.4 trillion in the same quarter last year.

This compares with a strong 16.7 per cent growth recorded in Q2 -- indicating a phase of normalisation after earlier momentum.

ICRA has projected that India's GDP growth may ease to 7.2 per cent in Q3 FY2025-26, compared to 8.2 per cent in the previous quarter.

Despite the moderation, growth is expected to remain above 7 per cent, supported by healthy festive demand and benefits from GST rationalisation.

Aditi Nayar, Chief Economist and Head of Research & Outreach at ICRA, said estimating GDP growth under the new base year remains challenging.

"The reasons for the estimated sequential slowdown include an unfavourable base effect, contraction in Government capital spending, subdued state government revenue expenditure, and weak merchandise exports," Nayar added.

On the revenue side, the pace of contraction in the Centre's non-interest revenue expenditure narrowed significantly.

It declined by 3.5 per cent year-on-year in Q3, compared to a sharper 11.2 per cent contraction in Q2.

Meanwhile, the combined non-interest revenue expenditure of 24 states grew by 2.7 per cent, although at a slower pace than the previous quarter.

Taken together, the Centre and states recorded a marginal 0.3 per cent increase in non-interest revenue spending in Q3, compared to a slight decline in Q2.

- IANS

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Reader Comments

P
Priyanka N
This "adjustment" needs more explanation. Is this a strategic pause for better project planning, or are there genuine fiscal constraints? While festive demand is a temporary boost, sustained growth needs consistent investment in infrastructure. Hope this is just a quarterly blip and not a trend.
R
Rohit P
Good to see states stepping up! Sometimes central schemes get delayed in bureaucracy. State governments are closer to the ground and might be executing projects faster. ₹2.1 lakh crore from states is impressive. This could lead to more region-specific development.
S
Sarah B
Reading this from an investor perspective. A dip in government capex can affect certain sectors like construction and capital goods in the short term. However, the maintained 7%+ GDP projection and strong state spending should keep the overall economic sentiment positive. Watching the next quarter closely.
K
Karthik V
The headline number looks bad, but context is key. After a very strong Q2 (16.7% growth), some normalization was expected. As long as the money is being spent wisely on quality projects, not just for headline numbers, it's fine. Quality over speed.
M
Meera T
Hope this contraction doesn't impact ongoing critical infrastructure projects, especially in rural areas. Roads, railways, and water projects can't afford delays. The government must ensure this is just a temporary reallocation and not a cut that affects jobs and development on the ground.

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