OPINION | The case for a continuing focus on public investment in the budget

Public investment has reshaped private capital formation.

Every Union Budget ultimately comes down to a simple question: what should the government do with its next rupee? As Budget 2026-27 approaches, that question has acquired sharper edges. With global growth uneven and domestic pressures mounting, policy debates are increasingly weighing the case for a stronger consumption push. Yet, the government has continued to position capital expenditure as the primary instrument for steering India toward a $5 trillion economy by 2027.

Infrastructure spending triggers a virtuous economic cycle

The reasoning is rooted in economic impact. A rupee spent on consumption typically delivers a one-time boost. A rupee spent on infrastructure, by contrast, triggers a chain of activity – supporting jobs, lowering costs, and raising productivity – allowing its impact to multiply well beyond the initial outlay.

In India’s case, empirical evidence consistently places this multiplier in the 2.5-3x range. In practical terms, every rupee spent on roads, railways, ports, housing, or power ultimately generates INR 2.5-INR 3 of GDP as its effects ripple through the economy.

The multiplier effect

Initial spending creates immediate demand across steel, cement, machinery, logistics, real estate, and services, while the assets created continue to raise productivity long after construction ends. This multiplier effect explains why public capital expenditure has remained central to fiscal strategy.

Since FY16, central government capital expenditure has expanded more than fourfold, crossing INR 11 lakh crore in FY25.

Benefits are visible in declining logistics costs

There is now growing evidence that the returns from this approach extend well beyond construction activity into economy-wide productivity gains. India’s logistics costs have been reassessed at 7.97 per cent of GDP, far lower than the widely quoted 13-18 per cent, according to a study commissioned by the Department for Promotion of Industry and Internal Trade (DPIIT) and conducted by the National Council of Applied Economic Research (NCAER).

This places India closer to advanced economies on logistics efficiency and reflects tangible gains from sustained investment in highways, rail freight corridors, port modernisation, and multimodal logistics. The improvement is structural rather than statistical: lower logistics costs directly enhance manufacturing and export competitiveness by reducing transit times, inventory holding, and modal inefficiencies. Railways, which have received record allocations in recent budgets are increasingly functioning as an economic lever – improving freight efficiency, lowering emissions, and connecting production centres more reliably to markets.

Positive spinoff on private investment

Public investment has also reshaped private capital formation. Improved highways, rail corridors, ports, power networks, and digital infrastructure have reduced project risk and improved returns across manufacturing, logistics, renewables, data centres, and urban services. In this sense, capex has acted less as a substitute for private investment, and more as a catalyst – shaping expectations, crowding in long-term capital, and anchoring investment cycles.

The next phase will have to be about integration

As asset creation reaches scale, however, the nature of the infrastructure challenge begins to change. Incremental gains taper if the focus remains building more in isolation. The next phase of returns will depend on how effectively infrastructure assets work together. Productivity gains increasingly come from integration – connecting transport corridors to industrial clusters, ports to hinterlands, and urban transit to housing and labour mobility – rather than from standalone expansion.

The broader macroeconomic context reinforces this approach. As India seeks to sustain 6.5-7 per cent growth amid global slowdown risks, infrastructure provides a stable domestic anchor. It strengthens export competitiveness by lowering logistics and energy costs, supports long-term objectives such as manufacturing scale-up and the energy transition, and sends a clear signal of policy continuity to markets. For investors and businesses planning long-term capital commitments, that signal matters.

What the budget should do

The real test for Budget 2026, therefore, will not be whether capex remains central, but how effectively it is deployed.

First, spending must be concentrated in high-multiplier areas such as logistics, urban infrastructure, power transmission, renewable integration, and digital backbones.

Second, public investment should be used more deliberately to crowd in private capital through PPPs, asset monetisation, and blended finance.

Third, execution quality must improve, with faster approvals, milestone-linked funding, and tighter monitoring to ensure that allocations translate into usable assets on the ground.

Capex is not merely another line item in the Budget; it is an economic strategy. As Budget 2026 approaches, the choice is whether policy will continue to back this long-term logic over short-term pressures. Doing so would signal a deliberate commitment to durable, inclusive growth; one that extends well beyond the budget year itself.

(Nilachal Mishra, Partner and Head of the Government & Public Services (G&PS), KPMG in India.)

Views are personal, and do not represent the stance of this publication.