Government holds capex steady, with key support to defence, power, and railways

Delivered a negative surprise to the defense sector

Jitendra Kumar Gupta

August 20, 2025 / 16:59 IST

Highlights:

Government capex increased marginally to Rs 11.21 lakh crore, below expectations
Defence capex up 12 percent, railways capex rises 6 percent
Shipbuilding, power, and nuclear energy initiatives get policy push

The market reacted negatively to the government's capital expenditure (capex) numbers, as the budget allocated Rs 11.21 crore for the fiscal 2026 as against the revised estimates of Rs 10.18 lakh crore for FY25, an increase of 3.7 percent. This marks a slight reduction from the original estimate of over Rs 11 lakh crore for FY25, raising concerns over muted infrastructure spending. The government’s conservative stance aims to maintain fiscal prudence, but it dampened investor sentiment in capex-linked sectors.

Despite the overall disappointment, specific sectors saw favourable allocations. Defence capital expenditure was increased by 12 percent to Rs 1.8-1.92 lakh crore, reinforcing India’s focus on military modernisation. Similarly, railways secured a 6 percent capex hike to Rs 2.5 lakh crore, though below market expectations, leading to a sell-off in railway stocks like IRCON and RVNL.

Broader capex-related stocks, including L&T, BEL, and Power Grid, were among the major losers due to the flat spending trajectory. However, the long-term investment outlook remains intact, particularly in defence, railways, and power. Policy measures such as the Shipbuilding Financial Assistance Scheme, backed by a Rs 25,000 crore Maritime Development Fund, are expected to benefit companies like Cochin Shipyard, Mazagon Dock, and GRSE, which have significant shipbuilding and repair capacities.

Energy transition also received a strong push, with plans to achieve 100 GW of nuclear energy capacity by 2047. The government announced additional borrowing of 0.5 percent of Gross State Domestic Product (GSDP) for states to drive power sector reforms. A Rs 20,000 crore nuclear energy mission will fund R&D for small modular reactors, benefiting companies like Power Grid, L&T, and Tata Power, which are key players in the energy infrastructure segment.

While the immediate sentiment is weak, the budget provides structural growth drivers for select industries, making them attractive for long-term investors.