Morgan Stanley Report: Central Government Capital Expenditure to Slow in FY26
A recent report by Morgan Stanley predicts a slowdown in the central government's capital expenditure (capex) for the remainder of the 2025-2026 fiscal year. This forecast is based on the observation that a significant portion of the annual budget was allocated in the first half of the fiscal year, leaving less room for spending in the latter half.
The report highlights a cyclical trend, noting that a substantial amount of the annual allocation has already been utilized. As a result, the pace of expenditure is expected to soften in the coming months. According to the report, central government capex reached Rs 6.6 lakh crore (trillion) in the first nine months of the fiscal year, accounting for 58.7% of the full-year budgeted target. This equates to a 3.4% GDP expenditure, compared to 2.7% in the previous fiscal year, indicating a strong initial push.
The government had budgeted a substantial capital expenditure of Rs 11.21 lakh crore (trillion) for the 2025-2026 fiscal year. The report further emphasizes that approximately 55% of the central government's capital spending has been directed towards roads and railways, reflecting a continued focus on infrastructure development and connectivity. These sectors have been key drivers of public investment throughout the year.
In contrast, state government capex has remained relatively stable, standing at around 1.7% of GDP for the first nine months of the fiscal year, similar to the previous year. However, state-level capital spending has been growing at an average rate of 13% year-on-year, indicating a steady but controlled expansion.
Central public sector enterprises (CPSEs) have also demonstrated robust momentum in their capital spending. The report reveals that CPSE capex has reached 64% of its target for the first nine months of the fiscal year, with a year-on-year growth of 14%. This growth is primarily driven by the strong performance of Indian Railways and the National Highways Authority of India (NHAI), and it is expected to surpass last year's performance.
Despite the anticipated slowdown in central government capex, the report highlights an improving outlook for private capex. Several supportive factors, including fiscal and monetary stimulus, are expected to boost consumption growth. Additionally, policy actions aimed at addressing structural challenges, such as new labor codes, are likely to contribute to a more robust private investment environment.
