India witnessed a 23.4% year-on-year decline in capital expenditure during the third quarter of FY2025-26, as per a recent report. This reduction in government spending is anticipated to slightly impact economic growth momentum for the quarter. Despite this, festive demand and state-level capital expenditure growth are providing overall support to economic activity.
State governments, however, displayed improved momentum in capital outlay and net lending. Data from 24 states revealed a 21.9% increase in their combined capital outlay and net lending in Q3, marking a reversal from the previous quarter’s contraction. The total capital expenditure of these states rose to Rs 2.1 trillion in Q3 from Rs 1.8 trillion in Q2, nearly matching the Centre’s capital spending level.
In Q3 FY2025-26, the combined capital expenditure of both Central and state governments amounted to Rs 4.2 trillion, slightly lower than the Rs 4.4 trillion recorded in the same quarter of the previous year. This indicates a phase of normalization following the robust 16.7% growth seen in Q2.
ICRA projects a GDP growth rate of 7.2% for India in Q3 FY2025-26, a decline from the 8.2% growth in the previous quarter. Despite this moderation, growth is expected to remain above 7%, supported by robust festive demand and advantages from GST rationalization.
Aditi Nayar, Chief Economist and Head of Research & Outreach at ICRA, highlighted the challenges in estimating GDP growth under the new base year. Factors contributing to the anticipated sequential slowdown include an unfavorable base effect, reduced government capital spending, subdued state government revenue expenditure, and sluggish merchandise exports.
On the revenue front, the contraction rate in the Centre’s non-interest revenue expenditure notably decreased to 3.5% year-on-year in Q3, compared to a sharper 11.2% decline in Q2. Simultaneously, the combined non-interest revenue expenditure of 24 states saw a 2.7% growth, albeit at a slower pace than the previous quarter. In Q3, the collective non-interest revenue spending of the Centre and states marginally increased by 0.3%, contrasting with a slight decline in Q2.
