Can Public Spending Finally Crowd In Private Capex?

In the post-pandemic period, government investment has taken centre stage in supporting India’s economic growth. Capital expenditure has risen more than fourfold between 2017-18 and 2025-26. In contrast, private capital expenditure, measured by private gross fixed capital formation, has remained subdued. Its share in GDP declined to 22% in 2023-24 from over 26% in 2012-13, and its contribution to overall investment has weakened in most years since 2015-16. While analysts have periodically pointed to “green shoots”, such signs of revival have repeatedly failed to sustain momentum.

A pickup in private capex in the first half of 2025-26 has nonetheless rekindled expectations that sustained public investment could finally crowd in corporate spending. The government’s infrastructure push over four consecutive years, however, has yet to translate into broad-based expansion of private capacity. In the Budget for 2026-27, capital expenditure growth has been pegged at 11.2% year-on-year, signalling continued public-sector support.

Capacity utilisation trends, however, suggest limited urgency for fresh private investment. The Reserve Bank of India’s Order Books, Inventories and Capacity Utilisation Survey for the second quarter of 2025-26 showed manufacturing capacity utilisation hovering around 75%, reflecting a range-bound pattern observed for much of the past decade. Historically, sustained readings above 80% have been considered necessary to trigger large-scale capacity additions.

That said, several factors could support revival in private capital expenditure over the coming year.

First, the post-pandemic public investment drive has materially strengthened infrastructure and logistics, lowering transaction costs and improving competitiveness. Personal income tax reductions and GST rationalisation last year, alongside relatively benign inflation, may bolster consumer demand. This is reflected in resilient vehicle sales, often viewed as a bellwether for consumer sentiment, and robust growth in consumer durables and non-durables, as indicated by recent Index of Industrial Production data.

Second, recent trade agreements with major markets such as the European Union and the United States have helped ease corporate concerns stemming from global trade uncertainty. While implementation will take time, improved clarity on trade policy may support business sentiment and lend impetus to export-oriented investment. At the same time, signs of stabilisation in India-China relations point to a less volatile external environment. Although the global backdrop remains fragile, it appears to be moving towards greater stability.

Third, corporate balance sheets are considerably stronger than in the previous investment cycle. Leverage has declined, profitability has improved, and cash balances remain comfortable, enhancing firms’ capacity to undertake new investments.

Fourth, access to credit has improved. The gross non-performing assets ratio of banks has declined to a decadal low of 2.1%, according to RBI data, strengthening the banking system’s lending capacity. Moreover, cumulative policy rate cuts totalling 125 basis points during 2025 have eased financing conditions and could further support capital formation.

Finally, structural reforms, including Production Linked Incentive schemes, improvements in the ease of doing business, financial-sector reforms, new labour codes, and the liberalisation of foreign direct investment norms, have created a more supportive policy environment for private investment.

Even so, the impact of these measures has yet to fully translate into a sustained capex cycle. The RBI Industrial Outlook Survey for October-December indicates that business sentiment in manufacturing remains guarded, reflecting weak global demand and lingering cost pressures. Although expectations for the next financial year are more optimistic, recent data suggest that fresh private-sector announcements moderated in the second and third quarters. Investment activity over the financial year has been concentrated in select sectors.

Capital expenditure has been skewed towards new-age industries such as renewable energy, electric vehicles, and data centres, as well as pharmaceuticals, electronics, and defence manufacturing. A broad-based revival across traditional sectors remains elusive.

Ultimately, a durable recovery in private capex will hinge on stronger domestic demand and improved export prospects. While inflation has moderated, wage growth has been uneven, constraining the pace of consumption recovery.  Government transfers and subsidies may provide short-term support, but they are unlikely to substitute for sustained income growth in driving private investment decisions.

A broad-based investment revival will depend on effective implementation of reforms, improved consumer confidence, and sustained demand-led increases in capacity utilisation. Until utilisation rates rise meaningfully above critical thresholds, government expenditure is likely to remain the primary engine of growth.

* Views are personal