By K. Ravichandran, Executive Vice-President and Chief Ratings Officer, ICRA
Union Budget 2025-26 presented by Finance Minister Nirmala Sitharaman has maintained a healthy budgetary outlay towards capital expenditure (capex) at Rs 11.2 trillion in the FY2026 budget estimate (BE), compared to Rs 10.2 trillion in the FY2025 revised estimate (RE), marking a 10.1 per cent year-on-year growth. The government’s focus on fiscal consolidation while maintaining its capex thrust augurs well for the economy. The continued focus on infrastructure spending reflects the Government of India’s commitment to boosting economic growth and development.
Trends in capex
The year-on-year increase of Rs 1 trillion in on-budget capex mainly stems from the undisclosed “new” schemes under the Ministry of Finance (Rs 0.3 trillion) and 50-year interest-free capex loans to state governments (Rs 0.3 trillion-Rs 1.5 trillion). The uptake of these loans by the states will depend on their tied and untied portions and the conditions associated with the tied amount. In addition, an early articulation of details for the new schemes would facilitate an early kick-off of capex by the centre.
As of end January 2025, the government has released Rs 1.1 trillion to the states under this scheme against the FY2025 RE of Rs 1.25 trillion. Disbursements under this scheme in FY2026 will be influenced by a mix of untied and tied loans, as well as the conditionalities related to the latter.
Moreover, in the FY2026 Union Budget, the government announced the continuation of the borrowing of 0.5 per cent of the gross state domestic product (GSDP) in FY2026. This borrowing is over and above the normal borrowing limits of states and is linked to the completion of prescribed power sector reforms. It was set to end in FY2025, based on the recommendations of the 15th Finance Commission. The extension of the additional borrowing of 0.5 per cent of the GSDP to FY2026 is a welcome move and is expected to support the state capex going forward. However, offtake under this provision has been availed of by only 9-12 states during FY2022-24.
Implications of the budget for infrastructure sectors
Infrastructure spending not only acts as a catalyst for economic growth, but is also likely to provide enormous employment opportunities for the unskilled and semi-skilled labour force. Over the years, the Indian government has implemented several measures and made sizeable investments in transportation infrastructure, especially roads and railway to improve logistics costs, reduce transit time and improve connectivity. The two ministries, the Ministry of Road Transport and Highways (MoRTH) and the Ministry of Railways, account for the lion’s share of the overall capital outlay. Their share has increased from around 24 per cent in FY2015 to around 47 per cent in the FY2026 BE.
Roads
The allocation to MoRTH in the FY2026 BE has remained largely flat at Rs 2.7 trillion as the government expects increased participation from the private sector following a slew of changes made to the model concession agreement for build-operate-transfer (BOT) projects. In line with the earlier years’ budget announcements, the government has continued with a nil borrowing programme for the National Highways Authority of India (NHAI) while keeping the allocation at a healthy level. In recent years, hybrid annuity projects accounted for a large chunk of public-private partnership (PPP) projects awarded in the roads sector, with only a handful of projects awarded under the BOT-toll mode. Given the stagnant budgetary support towards MoRTH, both NHAI and MoRTH must increasingly rely on monetisation and the BOT model to award projects. The Union Budget has set a target of Rs 350 billion in private sector investment in the roads sector, mobilising about Rs 300 billion through asset monetisation in the FY2026 BE. Further, the Pradhan Mantri Gram Sadak Yojna has received an allocation of Rs 190 billion, a 31 per cent year-on-year increase.
Railways
Indian Railways is modernising its signalling and safety systems to enhance operational efficiency and safety across its vast network. The government’s focus on improving railway infrastructure (track infrastructure and safety standards) and passenger experience (station amenities and rolling stock) is reflected in the healthy budgetary allocation. The overall capital outlay for railways has been steadily increasing over the years, reaching Rs 2.52 trillion in the FY2026 BE. While the year-on-year growth has remained flat, the allocation has expanded by 130 per cent in the past five years, highlighting the government’s focus on the railway sector. About 1,337 railway stations have been identified for redevelopment/modernisation, of which work has already started on 1,197 stations.
Urban infrastructure
Urban infrastructure was another key focus area for the government in the budget, driven by the country’s increasing urbanisation. As per a World Bank study, about one-third of India’s population lives in urban areas, with this share expected to exceed 40 per cent by 2036. Consequently, to address the needs of the changing urban landscape, significant investments are required in housing, sanitation and public transportation (metro connectivity). The capital outlay for the Ministry of Housing and Urban Affairs has been hiked by a healthy 18.8 per cent year on year to Rs 376 billion in the FY2026 BE. With 
an aim to modernise cities, the government will set up the Urban Challenge Fund of Rs 1 trillion to implement proposals for “Cities as Growth Hubs”, “Creative Redevelopment of Cities” and “Water and Sanitation”, as announced in the July 2024 budget. This fund will finance up to 25 per cent of the cost of bankable projects, with a stipulation that at least 50 per cent of the cost is funded by bonds, bank loans and PPPs. An allocation of Rs 100 billion is proposed for FY2026. This will encourage private participation while providing long-term funds for the sustainable development of cities.
The budget has also underscored the government’s continued focus 
on the affordable housing segment, as reflected in the higher allocation of 54 per cent towards the PMAY-Urban programme in the FY2026 BE as compared to the FY2025 RE. This should aid the affordable urban housing segment. Further, the introduction of a second tranche of the Special Window for Affordable and Mid-Income Housing Fund with a budgetary allocation of Rs 150 billion is likely to provide much-needed liquidity support to stressed residential projects. This will help complete an additional 40,000 incomplete housing units in the country, providing some relief to buyers.
The Jal Jeevan Mission (JJM) has been extended until 2028 with an enhanced total outlay of Rs 670 billion. The year-on-year increase in allocation for the JJM is more than 195 per cent, making it a definite positive.
Aviation
The budget also announced a modified Ude Desh ka Aam Naagrik (UDAN) scheme, which will be launched to enhance regional connectivity to 120 new destinations and cater to an additional 40 million passengers over the next 10 years. The scheme will also support helipads and smaller airports in the hilly and Northeastern regions of the country. The introduction of a modified UDAN scheme and the launch of new airports will strengthen air connectivity to underserved and unserved regions, increasing accessibility to smaller towns. The modified scheme will help increase penetration on UDAN routes, which has remained low at 1-4 per cent (during FY2018-24). The budget also announced the expansion of airports through the greenfield route in Bihar, in addition to the brownfield expansion of capacities of existing airports. These initiatives to strengthen the UDAN scheme, coupled with the expansion of airports, augur well for the future of the airport infrastructure sector.
In sum
Union Budget 2025-26 has made substantial allocations on an aggregate basis and introduced several initiatives to boost the infrastructure sector in India. While the actual allocation has fallen short of the industry’s expectations, given the adherence to a prudent fiscal consolidation trajectory, the government could not have gone beyond this limit.
Nonetheless, the healthy capital expenditure, focus on transportation and urban development, and enhanced regional connectivity under the UDAN scheme are expected to support the country’s economic growth and development. The key factors to watch will be the successful implementation of these projects in terms of achieving the desired outcomes and ensuring sustainable economic growth in the coming years.
