FY27 Budget: Capex push capped by borrowing, crowding out fears

• Upcoming Union Budget (2026-27) is unlikely to significantly increase central capital expenditure (capex) due to concerns about higher market borrowing and crowding out private investment.
• Finance ministry officials indicate central capex may be pegged at 3.2% of GDP for FY27, a slight increase from current levels, as government investment is nearing optimal.
• Higher market borrowing would lead to increased interest payments and raise the cost of capital across the economy, a situation Finance Minister Nirmala Sitharaman deems "not affordable."
• Limited fiscal headroom, due to pre-committed tax revenues, restricts the Centre's ability to undertake additional capital spending.
• For overall public investment to rise, states, particularly fiscally stronger ones, will need to contribute a larger share of capital spending.

Why It Matters: High borrowing limits government capex, potentially slowing economic growth.