The Capex Budget and the Capacity to Spend It

Pritiraj BrahmaFounding Partner, Pritiraj & Partners · 5 February 2026

₹12.22 lakh crore of capital expenditure against a 4.3% deficit. The Union Budget 2026-27 makes a coherent bet — and hands the binding constraint to the states.

A budget can allocate capital in a day. Building the thing the capital pays for takes a district four years. That gap, not the deficit number, is what this budget will be judged on.

The Union Budget for 2026-27, presented on 1 February 2026, is unusually legible. It does one thing, and it does it with conviction: it spends on assets while narrowing the deficit. Total expenditure is pegged at ₹53.47 lakh crore, capital expenditure at ₹12.22 lakh crore — about 12.3 per cent above the revised estimate for FY26 — and effective capital expenditure, which counts grants to states used for asset creation, at ₹17.15 lakh crore, or roughly 4.4 per cent of GDP. The fiscal deficit is targeted at 4.3 per cent of GDP against 4.4 per cent in the revised estimate for 2025-26, and central government debt is projected to fall to 55.6 per cent of GDP from 56.1 per cent.

That is a coherent position, and it deserves to be assessed on its own terms rather than through the annual ritual of counting winners and losers.

Four findings anchor this analysis:

1. The composition shift is the substance. Total spending rises about 8.8 per cent over the FY26 revised estimate while capital expenditure rises 12.3 per cent. Capital spending is growing faster than the budget containing it — a deliberate change in what the Union government is for, sustained now across several budgets.
2. The consolidation is real but slowing. A move from 4.4 to 4.3 per cent is a tenth of a point. The deficit has come down a long way from the pandemic spike of 9.2 per cent of GDP in 2020-21, and the remaining distance to the FRBM medium-term anchor of 4 per cent is now being covered slowly, on the assumption of 10 per cent nominal growth in 2026-27.
3. The industrial policy is targeted rather than broad. Manufacturing support is directed at seven strategic and frontier sectors; Biopharma SHAKTI carries ₹10,000 crore over five years with three new NIPERs and seven upgraded ones. On the investment-attraction side, foreign companies providing cloud services from data centres in India receive an income tax exemption to 2047 subject to serving Indian customers through a domestic reseller, and IT and IT-enabled services are unified under a safe harbour margin of 15.5 per cent.
4. Risk-sharing is becoming an instrument in its own right. An Infrastructure Risk Guarantee Fund is to be set up to give private developers confidence through the development and construction phase, and CPSE real estate is to be recycled through dedicated REITs. Both are attempts to move private capital into infrastructure without putting the whole risk on the exchequer.

The number that is not in the budget

Effective capital expenditure of ₹17.15 lakh crore includes grants to states for asset creation. That accounting choice is defensible — a road is a road whether the Union or a state builds it — and it also relocates the hardest part of the problem.

An allocation is not an asset. Between the two sit land acquisition, environmental clearance, tendering, contractor capacity, supervision and payment. Every one of those steps happens in a state, most of them in a district, and none of them is funded by the line item that pays for the structure. This Review has argued that India's binding constraint is rarely allocation and almost always the machinery of delivery; a budget that increases capital allocation by 12.3 per cent without a comparable increase in the capacity to convert it produces the same outcome that has followed every previous surge — a rising gap between what is sanctioned and what is commissioned, and a growing pile of projects that are neither cancelled nor finished.

The honest counter-argument is that this is precisely what the Infrastructure Risk Guarantee Fund is for: bringing in private developers who carry their own execution capability. That is a genuine answer for large projects with bankable revenue. It is not an answer for the district road, the school building or the water scheme, which is where a large share of effective capex actually lands.

The tax side, and who it is aimed at

The full income-tax rebate for individuals earning up to ₹12.75 lakh a year is a substantial transfer to the salaried middle class, and it is the measure most people will actually feel. Combined with the data-centre exemption and the transfer-pricing simplification, the tax architecture of this budget is directed at two constituencies: urban salaried consumers, and the technology capital the government wants to domicile in India.

Both are reasonable targets. Both are also concentrated. A rebate at that threshold reaches households already inside the formal tax net; the majority of Indian workers are not. That is not a criticism of the measure — it is an observation about what a tax instrument can and cannot do in an economy where most income is informal, and about why the delivery of public services, rather than tax relief, remains the operative lever for most households.

Reading it beside the Finance Commission

The Sixteenth Finance Commission's report was tabled in Parliament on the same day. The two documents should be read together, because their combined signal is sharper than either alone: the Union is spending heavily on capital formation while the states enter a five-year award in which revenue deficit grants have been discontinued and much of the new grant money is routed to local bodies against performance conditions.

The net effect is that more of India's capital programme now depends on state and local execution at precisely the moment when state fiscal cushions are thinner. That is not necessarily wrong — conditional money that rewards capacity is better designed than unconditional money that does not. But it does mean the risk in this budget sits mostly outside the budget.

What we would do

For a state government reading this budget as an opportunity rather than an announcement, five things follow.

1. Build the project pipeline before the money is available, not after. The states that draw the largest share of central capital transfers are consistently those with shovel-ready, cleared, tendered projects on the shelf. Preparation is the competitive advantage, and it is cheap.
2. Measure commissioning, not sanction. Publish, per department, the value sanctioned against the value actually commissioned and the median time between the two. Almost no state publishes this, which is why the gap persists unexamined.
3. Staff the project-management function explicitly. A capital programme growing at double digits with a project management cadre that is flat will convert the increase into delay, not assets.
4. Treat the Infrastructure Risk Guarantee Fund as a design problem. States that structure projects to fit its risk-sharing terms will attract private developers; states that submit the same unbankable proposals in a new envelope will not.
5. Plan the revenue side for a world without the old cushions. The Union has chosen capital formation and gradual consolidation. States that assume the previous pattern of discretionary top-ups will be planning against a budget that no longer exists.

This is a competent budget with a clear theory: build assets, hold the deficit, attract technology capital. Its theory is sound. Its risk is that the arithmetic is done in Delhi and the work is done in a district office that nobody has funded to do it.