4 February 2025

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Low base to push combined capex growth to 13.4% in FY26BE

Budgeted at 3.7% of GDP in FY26, lower than in pre-Covid years



What is the budgeted capex growth and what should be included in the capex budget? The answers to these questions

should not be a matter of confusion but they are. Therefore, we attempt these questions in this note.



As of last year, the Center’s budgeted capex estimates were widely quoted, which were growing at a fast pace. In the

past many years, we have highlighted that off-budget capex (done by central public sector enterprises or CPSEs) must be

included in the budgeted capex to find out the true capex estimates. While the inclusion of CPSEs is a widely accepted

practice now, another line item – called ‘grants for creation of capital assets’ to states/UTs – is included in the budgeted

and CPSEs capex this year to estimate growth in the Center’s capex.



Based on the headline data, growth in the Center’s capital spending is revised to 7.3% YoY in FY25RE (from 16.9% YoY in

FY25BE) and is budgeted to grow 10.1% YoY in FY26BE. CPSEs’ capex is budgeted to grow 12.9% YoY in FY26BE, from a

decline of 1.9% YoY in FY25RE (13.0% YoY in FY25BE), and the ‘grants for creation of capital assets’ are budgeted to grow

at a 14-year high pace of 42.4% YoY in FY26BE, compared with a fall of 1.3% YoY in FY25RE (21.7% YoY in FY25BE). All

combined, the aggregate capex is budgeted at INR19.8t in FY26BE from INR17.0t in FY25RE (INR18.7tn in FY25BE),

implying a growth of 16.4% YoY next year, from a revised growth of 3.5% this year (from 17.1% YoY in FY25BE).



There are good reasons why ‘grants for creation of capital assets’ should not be included in the Center’s capex. Many of

these schemes, such as MGNREGA or PM Surya Ghar Muft Bijli Yojana, are not capex, and more importantly, such

expenditure on capital assets will be included in states’ capex.



Three further adjustments are needed to understand the true extent of the GoI’s true capex: 1) The Center’s capital

spending has two parts – capital outlays/expenditure (or capex) and loans and advances (L&As). The latter must be

excluded, as they would be included in states’ capex; 2) The GoI has included the equity infusion of INR339b into BSNL in

FY26BE under capex, which must also be excluded, as it does not have any capex multiplier; and 3) Investments of Food

Corporation of India (FCI), within CPSEs capex, must be excluded since they are operational expenses.



After adjusting these factors, the combined capex is budgeted to grow 13.4% YoY in FY26BE vs. 4.7% growth in FY25RE

(revised from 14.3% YoY in FY25BE). Further, the GoI has included INR417b as ‘New Schemes’ under the Ministry of

Finance, for which we could not find any details (vs. INR91b in FY25RE, revised from INR626b in FY25BE). The combined

capex growth will ease to 10.7% YoY in FY26BE, from 3.9% YoY in FY25RE (8.5% YoY in FY25BE), if we exclude the

allocation to ‘New Schemes’.



Overall, the combined capex is budgeted at 3.7% of GDP in FY26BE, better than 3.6% in FY25RE but lower than 3.8% of

GDP in FY24 and 3.9% of GDP in the pre-Covid years.

Exhibit 1: Center’s capex budgeted to grow 10-14% YoY in

FY26…

Center's capital spending (% YoY)

48

39.0

36

24.8

24

25.0

12

0

FY22

FY23

FY24

22.2

24.0

7.3

4.9

3.7

9.7

FY26BE

13.6

10.1

28.3

Headline

Capex^

Adj capex*

24

18

12

6

6.9

0

FY22

@Center + CPSEs

FY23

FY24

Exhibit 2: …and the combined capex, with CPSEs#, is

targeted to grow 11-13%

Combined@ capital spending# (% YoY)

Headline

Capex^

Adj capex*

21.4

14.0

16.6

7.1

7.8

4.7

3.9

4.6

FY25RE

FY26BE

10.7

13.4

10.8

FY25RE

^Excluding Loans & advances to states and capital infusion into PSUs

*Excluding ‘New Schemes’ under the Ministry of Finance

#CPSEs capex excluding DF&PD

Source: Budget documents, MOFSL

Nikhil Gupta

– Research analyst

(Nikhil.Gupta@MotilalOswal.com)

Tanisha Ladha

– Research analyst

(Tanisha.Ladha@MotilalOswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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What is the Center’s true capex budgeted for FY26BE?

Based on the headline data,

the growth in the Center’s capital spending is revised to 7.3% YoY in FY25RE (from

16.9% YoY in FY25BE) and is budgeted to grow 10.1% YoY in FY26BE. CPSEs’ capex is

budgeted to grow 12.9% YoY in FY26BE compared with a decline of 1.9% YoY in

FY25RE (13.0% YoY in FY25BE).

We must, however, make three adjustments to the headline data to understand the

extent of GoI’s true capex. Let’s discuss them one by one.

Exhibit 3: Detailed analysis of capital outlays by CG and CPSEs

INR b, unless otherwise mentioned

FY23

FY24

Central government capital spending (Budgeted allocation)

Ministry of Defense

1,429

1,543

Ministry of Railways

Ministry of Road Transport & Highways

Department of Telecommunications

Capital infusion to BSNL

Police

Others

2

FY25BE

1,720

2,520

2,722

844

831

101

1,472

1,715

1,424

11,111

(16.9 )

8,856

4

4

FY25RE

1,595

2,520

2,589

750

721

158

922

1,707

1,394

10,184

(7.3)

8,070

(4.9)

36

130

707

1,289

421

250

992

3,824

(-1.9)

3,574

(4.4)

1,631

2,650

2,589

11,644

(3.6)

4.7

FY26BE

1,800

2,520

2,591

502

339

118

1,381

2,258

3

1,593

2,105

556

82

482

1,153

927

7,400

(24.8)

6,207

1

2,426

2,699

605

568

98

511

1,611

1,229

9,492

(28.3)

7,695

266

Includes transfer of INR265b to

universal service obligation fund

2

1

Loans and advances (L&As)

States/UTs/foreign governments

Total capital spending (% YoY)

Capital outlays (Capex, % YoY)

5

Includes INR626b/INR91b/INR417b

in FY25BE/FY25RE/FY26BE as ‘New

Schemes’ under MoF

3

1,706

11,211

(10.1)

9,166

(13.6)

5

Includes INR200b for ‘other

scientific research’

4

FY25BE over FY24RE

(22.2)

(24.0)

(15.0 )

Central Public Sector Enterprises (CPSEs)

Ministry of Defense

Ministry of Railways

Ministry of Power

Ministry of Petroleum & Natural Gas

Ministry of Housing & Urban

development

Food corporation of India (FCI)

Others

Total capital outlays (% YoY)

Total capex (Excluding FCI, % YoY)

28

447

574

1,190

165

305

922

3,631

(-17.0)

3,326

32

196

544

1,369

234

477

1,048

3,900

(7.4)

3,423

33

130

667

1,185

425

270

977

3,686

(13.0 )

3,417

4

4

41

130

858

1,324

622

280

1,061

4,316

(12.9)

4,036

(12.9)

1,841

2,650

2,591

13,202

(3.7)

13.4

Excluding capital infusion into PSUs

and L&As to states

6

Excluding capital infusion into

PSUs, L&As to states and FCI’s capex

(but including ‘New Schemes’)

(-11.7)

(2.9)

(12.5 )

6

Combined capital outlays (Capex)

1,457

2,040

2,105

9,534

(3.5)

7.8

1,575

2,621

2,699

11,118

(3.8)

16.6

1,753

2,650

2,722

12,273

(3.7)

14.3

4

Ministry of Defense

Ministry of Railways

Ministry of Road Transport & Highways

Combined capex

(as a percentage of GDP)

YoY (%)

6

Source: Union Budget documents, MOFSL

4 February 2025

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Excluding L&As to states,

the GoI’s capex is budgeted

at INR9.5t in FY26BE, up

8.1% YoY, following an

average growth of 22%

during FY21-FY25RE

a. Segregate capital outlays (capex) from L&As:

Capital spending by the GoI has

two components – capex and L&As. From an average of ~10% in the pre-

pandemic years, L&As accounted for ~17% of GoI’s total capital spending in FY25

and they are budgeted to grow significantly to 20% in FY26, which is the highest

share since FY05, barring FY21.

The GoI has budgeted L&As worth INR2.3t in FY26BE (32.3% YoY growth in

FY26BE), including a transfer of INR1.7t to states. These L&As will be eventually

counted as states’ capex, and thus, they must be excluded from the GoI’s capex.

Excluding L&As to states, the GoI’s capex is budgeted at INR9.5t in FY26BE, up

8.1% YoY, following an average growth of 22% during FY21-FY25RE.

A total of INR1.89t has been

allocated during the past

four years as capital

infusion into BSNL under

the GoI’s capital spending

b. Equity infusion into PSUs must also be excluded:

A detailed ministry-wise

analysis of the capex also reveals that the Department of Telecommunications

(DoT) has included financial relief/capital infusion totaling INR266b into BSNL in

FY23 (down from INR447b/INR333b in FY23BE/FY23RE), INR568b in FY24 (down

from INR648b in FY24RE), INR721b in FY25RE (down from INR831b in FY25BE)

and another INR339b in FY26BE. Thus, a total of INR1.89t has been allocated

during the past four years as capital infusion into BSNL under the GoI’s capital

spending. These capital infusions pushed the allocation under the Ministry of

Communications from less than INR40b in FY22 to INR750b in FY25RE and

INR502b in FY26BE.

After excluding L&As to states and such financial support to various PSUs, the GoI’s

capex is budgeted at INR9.2t, up 13.6% YoY in FY26BE, following an average growth

of 20% during FY21-FY25RE

(Exhibit 3 on the preceding page).

The growth in capital

spending, excluding L&As to states and equity infusion into PSUs, is higher than the

growth in headline capital spending because of a lower number budgeted for equity

infusion into BSNL (INR339b in FY26BE vs. INR721b in FY25RE).

c. ‘New Schemes’ under the Ministry of Finance:

Further, the GoI has allocated a

sum of INR417b as ‘New Schemes’ under other expenditure in the Department

of Economic Affairs, Ministry of Finance (included under Others in

Exhibit 3

above). We could not find any details regarding this line item, just like in the

FY25 budget. We understand that this amount could be allocated against some

schemes that are work-in-progress but not sure about it. A similar allocation of

INR626b was made in FY25BE, which is now revised down to INR91b in FY25RE.

In fact, a large part of the downward revision in the Center’s capex in FY25 was

on account of this item, which makes us believe that the adverse economic

impact was limited.

After excluding L&As to

states and such financial

support to various PSUs, the

GoI’s capex is budgeted to

rise 13.6% YoY in FY26BE

If we further exclude

INR417b under ‘New

schemes’, the GoI’s

adjusted capex is budgeted

to grow 9.7% YoY this year

If we do not exclude ‘New Schemes’, the GoI’s capex is budgeted to grow 13.6% YoY

in FY26BE. However, if we further exclude INR417b, the GoI’s adjusted capex is

budgeted to grow 9.7% YoY this year

(see Exhibit 1).

Internal and Extra Budgetary Resources (IEBR) of CPSEs budgeted to grow at an

eight-year high pace in FY26:

Budget allocations only account for a portion of the

total capital spending by the GoI. The planned capital outlays (or capex) by CPSEs,

4 February 2025

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and their likely financing, are also provided for in the Union Budget. From an

economic perspective, what matters is the combined capital outlay of the GoI and

CPSEs.

Excluding FCI, IEBR of CPSEs

is budgeted to increase

12.9% YoY in FY26BE, the

highest in eight years

After making the above-mentioned adjustments in the GoI’s investment spending,

we have made one adjustment in CPSEs’ capex. Since FY18, the DF&PD (which

includes the allocation to FCI) has undertaken the maximum capital outlays among

CPSEs, averaging about INR2t each year during FY18-FY20. As the GoI cleared all the

arrears in FY21 and took over FCI debt on its books, the off-budget capex by the

DF&PD reduced to about INR600b in the following two years, i.e., FY21-FY22, before

falling further to INR200-300b in the last four years (FY23-FY26BE). This, we believe,

must be excluded from the aggregate IEBR of CPSEs to understand the true extent of

the infrastructure push by the GoI. Excluding FCI, IEBR of CPSEs is budgeted to

increase 12.9% YoY in FY26BE, the highest growth in the last eight years

(Exhibit 4).

Exhibit 5: Actual CPSEs’ capex met BEs in FY24, though

averaged 95% in the past decade

IEBR of CPSEs# (%)

Actual/BEs

Exhibit 4: CPSEs’ capex (excl. FCI) is budgeted to increase at

eight-year high pace of 12.9% YoY in FY26BE

CPSEs capex#

2.3

2.3

2.3

2.1

1.6

18.2

10.7

4.6

-9.0

FY18

FY20

-10.5

-11.7

FY22

FY24

FY26BE

2.9

4.4

1.2

1.2

1.1

1.1

12.9

% of GDP (rs)

% YoY

101

92

78

74

98

85

104

109

103

93

87

100

78

FY12

FY14

FY16

FY18

FY20

FY22

FY24

#Excluding FCI allocations

Source: Budget documents, CSO, MOFSL

Actual capex by CPSEs tends

to be 90-95% of BEs/REs,

with much sharper cuts vs.

BEs in FY22 and FY23

At the same time, historical data suggests actual capex by CPSEs tends to be about

90-95% of the budgeted and revised estimates (BEs/REs), with much sharper cuts vs.

BEs in FY22 and FY23

(Exhibit 5).

CPSEs’ capex was revised down to INR3t in FY24,

from INR3.4t in FY24BE. However, in FY25RE, CPSEs capex was higher than what was

budgeted (INR3.6t in FY25RE vs. INR3.4t in FY25BE). Therefore, it is not necessary

that CPSEs’ capex for FY26 would be revised lower.

Low base pushes combined capex growth to 13.4% YoY in FY26BE; budgeted at

3.7% of GDP, lower than in pre-Covid years:

Overall, from an economic perspective,

what matters is the combined capex of the GoI (on-budget) and IEBRs of CPSEs (off-

budget). With various adjustments (excluding L&As to states, capital infusion to

PSUs and DF&PD from CPSEs), our estimates suggest that the combined capital

outlays grew 4.7% YoY in FY25RE and were budgeted to rise by 13.4% YoY in FY26

(see Exhibit 2 above).

The combined capex, thus, is budgeted at 3.7% of GDP in FY26BE, better than 3.6%

in FY25RE but lower than 3.8% of GDP in FY24 and 3.9% of GDP in the pre-Covid

years

(Exhibit 6).

The combined capex (of the

Center and CPSEs) is

budgeted at 3.7% of GDP in

FY26, higher than 3.6% in

FY25RE, but lower than the

pre-Covid period

4 February 2025

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Exhibit 6: Combined capital outlays of the government and CPSEs

Capital outlays (% of GDP)

4.0

3.5

2.3

2.3

3.9

3.3

2.3

1.8

2.2

2.3

2.3

2.3

4.0

3.9

3.8

3.9

Centre#

3.9

CPSEs*

3.6

Combined/Aggregate

3.7

1.6

3.5

1.2

3.8

1.2

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3.6

1.1

3.7

1.1

1.9

2.1

1.7

FY12

1.5

FY13

1.6

FY14

1.5

FY15

1.7

FY16

1.7

FY17

1.5

FY18

1.6

FY19

1.6

FY20

1.5

FY21

2.2

2.3

2.6

2.5

2.6

FY22

FY23

FY24

FY25RE FY26BE

#Excluding L&As to states and equity infusion to PSUs

*Excluding FCI

Source: Union Budget documents, CSO, MOFSL

After adjusting the Center’s

capex by INR417b allocated

as ‘New Schemes’, the

combined capex will fall to

3.6% of GDP this year

After adjusting the Center’s capex by INR417b allocated as ‘New Schemes’ under the

Ministry of Finance, the Center’s capex growth will be 9.7% and the combined capex

growth will be 10.7% YoY in FY26BE

(see Exhibit 2 above).

Accordingly, the combined

capex will fall to 3.6% of GDP next year.

‘Grants-in-aid for creation of capital assets’ must not be included in the Center’s

capex:

Unlike in the past years, there is an argument that the grants-in-aid to states

for the creation of capital assets should also be included in the Center’s capex. Such

grants are budgeted at INR4.3t in FY26BE, with a 14-year high growth of 42.4% YoY,

compared with a fall of 1.3% YoY in FY25RE (21.7% YoY in FY25BE). If we add these

grants to the combined capex discussed above, the aggregate capex is budgeted at

INR19.8t in FY26BE from INR17.0t in FY25RE (INR 18.7tn in FY25BE), implying a

growth of 16.4% YoY next year, compared with revised growth of 3.5% this year

(from 17.1% YoY in FY25BE).

There are good reasons why ‘grants for creation of capital assets’ should not be

included in the Center’s capex. Many of these schemes, such as MGNREGA or PM

Surya Ghar Muft Bijli Yojana, are not capex

(Exhibit 7).

Exhibit 7: Key allocations under ‘Grants for creation of capital assets’

(INR b)

MGNREGA

Jal Jeevan mission/National Rural drinking water mission

Pradhan Mantri Awaas Yojana – Gramin (PMAY-G)

PM Surya Ghar Muft Bijli Yojana – New & renewable

energy

Pradhan Mantri Gram Sadak Yojna (PMGSY)

Pradhan Mantri Awaas Yojana – Urban (PMAY-U)

Reform Linked Distribution Scheme – Power

Transfer to states

Urban challenge fund

Road works

Others

Total (% YoY)

Arranged as per top 10 schemes in FY26BE

FY23

902

507

411

…

189

154

25

70

…

75

730

3,063 (26.2)

FY24

888

647

192

…

140

197

98

65

…

86

726

3,039 (-0.8)

FY25BE

853

651

506

56

FY25RE

853

210

286

102

FY26BE

854

625

509

190

189

144

189

236

115

172

123

124

158

193

190

150

…

…

100

87

87

95

1,031

888

1,229

3,908 (21.7)

2,999 (-1.3)

4,272 (42.4)

Source: Union Budget documents, CSO, MOFSL

4 February 2025

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Just like the Center’s loans, if these grants are spent on capex by states, then they

would form a part of states’ capex. Therefore, we must exclude them from the

Center’s budgeted capex to avoid double counting.

Just like the Center’s loans,

if these grants are spent on

capex by states, then they

would form a part of states’

capex

Interestingly, it is not clear if the states classify all these expenditures as capex. For

instance, the Center’s grants to states for capital assets’ creation under the

Department of Rural Development (excluding MGNREGA and considering only

PMAY-G and PMGSY) totaled INR420b/INR600n in FY22/FY23. In contrast, states’

aggregate capex under this Department was lower at about INR300b and INR400b,

respectively.

If one argues that a lot of spending under such grants actually represents capex, and

thus, should ideally be included under capex, then one must also note that a part of

spending under capex budget is actually current expenditure (wages/salaries etc.),

and thus, should be excluded. Since such reclassification is impossible for any

outsider (and not sure if even the government can conduct such an exercise), it is

better to estimate capex budget under the existing classifications.

Therefore, we keep grants for the creation of capital assets outside the capex

estimates.

Accordingly, the combined capex of the Center and CPSEs (excluding loans &

advances to states, capital infusion into PSUs and FCI’s capex) is budgeted to grow

13.4% of GDP in FY26, supported by a low base of 4.7% in FY25RE (revised down

from 14.3% in FY25BE). It is budgeted at 3.7% of GDP in FY26, slightly better than

3.6% of GDP in FY25RE, but lower than in the pre-Covid years (or 3.8% in FY24).

Overall, for the first time in almost a decade, the GoI focused more on consumption

and savings rather than capex. We need to keep a keen eye on whether this change

is a one-off or if it suggests a change in the paradigm.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

4 February 2025

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Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

> - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

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appropriate measures to make the recommendation consistent with the investment rating legend.

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