India’s Capital Expenditure Contracts 23.4% in Q3 FY2025-26; GDP Growth Seen Moderating to 7.2%

Central Capex Declines Sharply in Third Quarter​

New Delhi, February 22: India’s capital expenditure recorded a sharp year-on-year contraction of 23.4 per cent in the third quarter of FY2025-26, according to data compiled by ICRA.

The slowdown in Central government spending is expected to moderately temper economic growth momentum during the quarter. Despite this, overall economic activity continues to draw support from festive demand and improved capital spending at the state level.

States Offset Central Slowdown With 21.9% Growth​

While Central capex weakened, state governments displayed stronger momentum. Data from 24 states showed that their combined capital outlay and net lending rose 21.9 per cent in Q3, reversing the contraction witnessed in the previous quarter.

In absolute terms, state capital expenditure increased to Rs 2.1 trillion in Q3 from Rs 1.8 trillion in Q2. The latest outlay nearly matched the Centre’s capital spending during the quarter.

When combined, Central and state capital expenditure stood at Rs 4.2 trillion in Q3 FY2025-26, slightly lower than Rs 4.4 trillion in the same period last year. This follows a robust 16.7 per cent growth recorded in Q2, indicating a phase of normalization after earlier momentum.

GDP Growth Likely to Ease to 7.2% in Q3​

ICRA has projected that India’s GDP growth may moderate to 7.2 per cent in Q3 FY2025-26, compared with 8.2 per cent in the preceding quarter.

Despite the anticipated slowdown, growth is expected to remain above the 7 per cent mark, supported by healthy festive demand and gains arising from GST rationalization.

Aditi Nayar, Chief Economist and Head of Research and Outreach at ICRA, said that estimating GDP growth under the new base year remains challenging.

She noted that the sequential slowdown is attributable to an unfavorable base effect, contraction in government capital spending, subdued state government revenue expenditure, and weak merchandise exports.

Revenue Expenditure Shows Mixed Trends​

On the revenue front, the pace of contraction in the Centre’s non-interest revenue expenditure narrowed considerably. It declined by 3.5 per cent year-on-year in Q3, compared with a sharper 11.2 per cent contraction in Q2.

Meanwhile, the combined non-interest revenue expenditure of the 24 states grew 2.7 per cent, though at a slower pace than in the previous quarter.

Taken together, the Centre and states recorded a marginal 0.3 per cent increase in non-interest revenue spending in Q3, compared with a slight decline in Q2.

The latest data reflects a moderation in public spending momentum during the third quarter, even as state-level investment and festive demand continue to provide underlying support to economic activity.