Where does the capex focus lie in Union Budget 2026?

Relying solely on the headline capital expenditure (capex) number in the Union Budget provides an incomplete picture of the government’s true infrastructure push. The budgeted capex for FY27, at Rs. 12.2 trillion versus the FY26 revised estimate of Rs. 10.96 trillion, does not fully capture the underlying trends for several reasons.

First, the headline figure includes equity infusions (such as the Air India infusion in FY22 or the BSNL infusion under the Ministry of Telecom) as well as capex-oriented loans and advances. These items must be stripped out to understand the actual asset-creating expenditure.

Second, many sectors that require significant infrastructure development—such as water supply, housing, metro systems, and commercial shipping—fall either under state jurisdiction or the private sector. Spending on these schemes does not result in asset creation on the Union Government’s books and is therefore recorded as revenue expenditure. These items must be added back. Finally, infrastructure spending financed through extra-budgetary resources—via PSUs or quasi-sovereign bodies—must also be incorporated to form a holistic view.

After making these adjustments, we find that the Centre’s effective infrastructure spending has increased by 18% year-on-year, reversing the modest contraction seen last year. Defence continues as the mainstay, with a 17% increase in allocations, while roads and railways see growth of around 11% each (including allocations under the Gram Sadak Yojana). After an introduction to Maritime Vision, provision for the shipping and ports industry kicks off. Housing and water also receive healthy allocations, though execution remains a key risk given that these segments have failed to meet budgeted targets over the past three years. In the power and renewables sector, spending remains PSU-driven through internal and extra-budgetary resources.

In addition to direct capex, Production-Linked Incentive (PLI) schemes are an important indirect driver of investment. Given that these schemes absorb part of the cost of capacity creation, tracking their allocations and utilisation is crucial. Subsidy disbursements under PLI have been rising steadily, reaching an estimated Rs. 200 billion in FY26. Between FY22 and FY26, total disbursements amount to Rs. 421 billion—around 14% of the committed envelope. The overall PLI corpus has expanded from Rs. 2.3–2.6 trillion four years ago to nearly Rs. 3 trillion today. For FY27, the government expects strong traction in autos, semiconductors, electronic components, and white goods. PLI utilisation in large-scale electronics and IT hardware may moderate in the near term, as the second round has only recently begun and is likely to gather momentum from FY28 onward.

Tax incentives are also an important lever to catalyse investment. In this context, the proposed tax holiday for foreign companies using India-based data centres could materially boost the sector. Under the proposal, foreign firms delivering services through Indian data centres would enjoy a tax holiday until 2047, subject to specific conditions: they cannot own or operate the data centres directly, must route domestic sales through an Indian reseller, and must receive formal government notification. Few major jurisdictions offer an incentive of comparable duration, potentially making India an attractive destination for hyperscalers such as Amazon, Google, and Microsoft. This could spur large-scale data-centre construction and significantly expand demand for power, transmission infrastructure, cooling systems, substations, optical fibre networks, and commercial real estate. However, important questions remain—particularly around whether hyperscalers would accept not owning or operating their facilities, and whether competing global hubs such as the US, Germany, or the UK might respond with counter-incentives.
To sum it all, the budget clearly had a sharper focus on quality of expenditure, accompanied by selective tax changes. Measures have been focussed on enhancing the long-term productive potential of the country to counter the external vulnerabilities and boost growth.

Infrastructure oriented spend budgeted to rise 18% in FY27

Source: Budget Documents, SBIFM Research

Subsidy disbursement under Production linked incentives kicks off