Overview
India’s remarkable economic expansion appears to have encountered a roadblock. Along with other factors including the global downturn and geopolitical concerns, the decrease in central government spending is now commonly seen as the primary cause of the weak growth at home.

Further, the government is battling economic issues such as slower domestic growth, rising welfare spending, and the need for consistent capital investment, even as the country approaches the date of the budget presentation, with Finance Minister Nirmala Sitharaman scheduled to present the Union Budget in the Lok Sabha on February 1. A declining rupee, muted economic growth, and increased global geopolitical uncertainty—especially with Donald Trump taking the helm as the 47th US President—will all be factors in the Budget.

Capex over the years
The total amount spent by the center has been declining since FY2021, when it reached a decadal high of 17.7% of GDP. Motilal Oswal Securities Financial Services notes in its study that the Center’s spending is expected to fall to a six-year low of 14.3% in FY2026. Keep in mind that revenue expenditures and capital expenditures (capex) make up the majority of government spending. Even after the general elections, government projects and capital expenditures have not improved, which has worried economists in recent years. As of November 2024, the overall expenditure was 56.9 percent of the Budgeted Estimate (FY2025), which is a two-decade low, down from 58.9 percent in FY2024. Regretfully, even the Center’s overall spending growth in FY2024 has fallen into the single digits (7.7%).

Key Reason for lowered government spending rate
The Center’s capex shortage is the reason for the lower spending. The government has used less than half of the Budget Estimates for capital expenditures between April and November, according to statistics made public by the Controller General of Accounts. Economists emphasize that in order to reach the FY2025 objective of INR 11.1 trillion, the Center’s capital expenditures must increase by 65% year over year between December and March. According to the Motilal Oswal estimate, FY2025’s capital expenditures will be short by almost INR1 trillion.

Budget Expectations
Motilal Oswal believes that capital expenditure loans to the states ought to be connected to their performance indicators, like the welfare-to-capex ratio and capital expenditure accomplishment in relation to budgetary goals. For example, states that prioritize welfare programs (such as monthly stipends) ought to be closely examined prior to being granted interest-free loans. It said that this will assist solve the Rs 1 trillion capex shortage projected in FY25 and guarantee fiscal prudence.

Simplifying GST slabs and lowering these burdens will increase disposable incomes, as indirect taxes make up over 60% of total tax receipts. According to Motilal Oswal, corporations should either make dividend income tax deductible or go back to previous methods in order to avoid double taxation. Investors may benefit from these actions, which may also increase tax compliance.

According to the brokerage business, increasing household income must come before increasing consumption. Supporting the nation’s second-largest employer, the construction industry, and giving MSMEs non-inflationary aid will help sustainably increase incomes. In order to help MSMEs stay competitive and integrate into the formal economy, Motilal Oswal fought for targeted aid.

Motilal Oswal stated that the government should aim for a fiscal deficit of 4.5% of GDP in FY26 while raising capital expenditures by 10% to 15%, even though revenue growth is slower. A capital expenditure surge is essential for economic momentum because FY25 spending is expected to fall to a six-year low of 14.3% of GDP. Based on CGA statistics, GoI’s capital expenditures decreased by 14.7% in the first seven months of the fiscal year. To achieve the 17.1% annual growth that was anticipated, GoI’s capital expenditures would need to increase by 60.5% in the remaining five months of the fiscal year.

Despite a significant tax cut in 2019, corporate capital expenditures climbed at a mere 8% CAGR from FY20 to FY24. According to Motilal Oswal, policymakers ought to concentrate on establishing an atmosphere that is conducive to sustainable investments, particularly when government capital expenditures are increasing at a 16 percent compound annual growth rate throughout the same time frame.

Conclusion
In the meantime, the private sector is also in a cautious attitude. Corporate concerns about growing input costs and geopolitical uncertainty are also reflected in the slowdown in domestic private investments during the third quarter of FY2025. Additionally, Indian corporations’ weak third-quarter results highlight declining consumption, which may subsequently reduce investor interest.