Year Ahead: Private capex seen taking the baton in 2026 as public-led infra spend peaks

Moneycontrol had reported earlier this month that the Centre may not peg capex target in FY26 above 3.2 percent of GDP, as it will lead to higher borrowing, which is "not sustainable".

Anitha Rangan, Chief Economist at RBL Bank says that capex in new age sectors, such as renewable energy, health, hospitality is gaining momentum. “Once this takes off and reaches a meaningful level this should boost fundamental demand and then the second level of capex,” she said.

Capital expenditure is crucial as it plays a key role in an economy’s growth.

In India, the Union Budget presented in February 2021 marked a strategic pivot towards a public investment-led growth strategy in response to the Covid-19 shock, with the capital expenditure target for FY22 set 35 percent higher than the initial estimate for FY21.

Since then, capital expenditure has helped uplift India’s growth, including in the first half of FY26, when it grew by 8 percent, supported by a 7.6 percent growth in gross fixed capital formation (GFCF).

GFCF’s share in real GDP growth is about 34 percent. However, the second half of the current fiscal is expected to see a sharp decline in growth, owing to external uncertainties, which may limit the capex growth as well, economists say.

According to Reserve Bank of India’s projections, real GDP growth in H2 is likely to be 6.75 percent. But, capex is expected to pick up pace in 2026.

"The growth outlook for 2026 for public and private capex appears to be more balanced. Private capex growth would be supported by continuing low levels of global crude prices, likely easing of global supply situations, particularly if the Ukraine war gets resolved (even if temporarily), and India’s continuing push for more and more bilateral free trade agreements," said DK Srivastava, Chief Policy Advisor, EY India.

Moreover, once the US tariff related issues are resolved, India’s exports along with private sector’s capital expenditure growth will pick up momentum, Srivastava added.

“FDI’s are another alternative and government is doing well by opening up sectors to foreign capital. This will also give the needed fillip,” Rangan added. The government recently allowed 100 percent FDI in the insurance sector from 74 percent earlier.

Defence, data centres production to rise

Data centres are emerging as a key infrastructure segment to support the global digital economy. India’s digital contribution to the nation’s GDP was 11.74% in FY23. It is expected to expand at nearly double the pace of the overall economy, potentially accounting for around 20% of the GDP by FY30, a note by PwC says.

India’s current data centre installed capacity is 1.5 GW, and by 2035, the total capacity is expected to reach to around 14 GW, backed by investment commitments from various Indian and global data centre operators, says PwC.

In 2025, India’s drone production turnover is around $4.2 billion, which is approximately 10 percent of global drone market. India already figures in the top ten countries, producing drones for military and civilian use. And in 2026, the production is expected to rise, especially since the government is likely to announce a manufacturing-focused incentive scheme under the ‘Drone Shakti’ initiative, which may involve a fiscal commitment of Rs 10,000 crore.

India is also setting its sights on becoming a global defence manufacturing hub with a target of achieving defence production worth Rs 3 lakh crore and defence exports worth Rs 50,000 crore by 2029, as per Defence Minister Rajnath Singh. In 2024-25, defence production amounted to Rs 1.51 lakh crore.

Notably, Uttar Pradesh has established itself as one of India’s most important defence manufacturing centres, marking a decisive shift in a sector that for decades remained concentrated around coastal and legacy industrial hubs. About 62 firms, in the past few years, have paved made investments worth Rs 11,997 crore in the state. Also, MoUs with over 110 companies are in the pipeline, bringing potential investments of nearly Rs 23,000 crore by FY28.

What happened in 2025?

According to Radhika Piplani, Chief Economist, Motilal Oswal Financial Services Ltd (MOFSL) public capex was frontloaded in H1 FY26, while private capex happened in pockets, and was not broad based. “As per our private capex study of NSE-500 companies' capex for the year we found power, electronics, defence, cement, ports and airlines doing capex in FY26,” she said.

Piplani expects capex of listed companies at Rs 8 lakh crore in FY26, 11% more than Rs 7.2 lakh crore in FY25. "If we only include core private sector capex, which our in-house tracker includes Power T&D, Coal, Telecom, Oil & Gas, Auto, Cement, Airlines, Ports, Defence and e-commerce, then the growth rate is projected at 23%. In my view, GST cut did not only lift private consumption but private capex too.”

The auto sector, for instance, has benefitted the most from the GST rate cut. “The loss in inventory is expected to be replenished by the Auto OEMs leading to a new wave of auto sector capex,” she added.

Meanwhile, central government’s capex in first seven months of FY26, accounted for 55.1 percent of the Budget Estimate at Rs 6.18 lakh crore. Capital outlay in defence services stood at Rs 1.03 lakh crore in April-October, accounting for 57 percent of BE. In FY25, the outlay accounted for 36 percent of the BE.

Capex by railways ministry stood at Rs 1.63 lakh crore in April-October, constituting 65 percent of BE, as against 62 percent of BE in FY25. And capex by highway ministry in the same period stood at Rs 1.75 lakh crore, accounting for 64 percent of BE, compared to 53 percent in FY25.

Capex by states, on the other hand, has accounted for about 41 percent of BE in April-October, reflecting lower momentum as against the Centre, as per RBL Bank’s Rangan.

“Given global economic uncertainties and in periods in which private sector investment growth remained low, the Centre has done well to rely heavily on its own capex growth to support overall economic growth,” said EY’s Srivastava.