India’s investment cycle is set to regain momentum in FY2027, driven by a sharp expansion in public capital expenditure and improved export competitiveness following tariff reductions, according to a report by Icra.
The agency said prospects for investment activity appear “bright” in the next financial year, supported by an 11.5 per cent increase in the Government of India’s capital expenditure budget to Rs. 12.2 trillion in FY2027 over the revised estimate for FY2026. Combined capital expenditure, including grants for asset creation and internal extra-budgetary resources of central public sector enterprises, is budgeted to rise 19.6 per cent to Rs. 22 trillion.
Icra said around 40 per cent of the incremental increase in the FY2027 capex target stems from a higher allocation towards 50-year interest-free capital assistance to states, which has been raised to Rs. 2.0 trillion from Rs. 1.5 trillion in FY2026. This, it noted, shifts greater responsibility for execution to state governments.
The improved outlook also reflects easing global trade headwinds. Icra said the reduction in US tariffs to 18 per cent from 50 per cent, along with a free trade agreement with the European Union, would offer Indian exporters a competitive advantage over several Asian peers. The improved visibility on tariffs is expected to support merchandise exports and encourage private sector capital expenditure, which has remained uneven across sectors.
High-frequency indicators presented a mixed picture in the December quarter of FY2026, though trends improved sequentially. Seven of the 11 investment-related indicators recorded better year-on-year performance in Q3 compared with Q2. These included capital goods output, led by machinery and equipment and commercial vehicles, cement production, infrastructure credit, medium and heavy commercial vehicle registrations, engineering goods imports, states’ capital outlay and net lending, and stamp duty collections.
However, other indicators weakened. The year-on-year growth in infrastructure and construction goods output, though still in double digits, moderated. Finished steel consumption, engineering goods exports, and the Centre’s capital expenditure also deteriorated in Q3 compared with the preceding quarter, partly due to frontloading of spending in the first half of the fiscal year.
The Centre pared its FY2026 capital expenditure target to Rs. 11.0 trillion from the budgeted Rs. 11.2 trillion, implying a 16.0 per cent year-on-year contraction in Q4 FY2026. The cut follows a 23.4 per cent decline in Q3 and is likely to weigh on gross domestic product growth in the final quarter, Icra said.
Despite the near-term moderation, project announcements remained buoyant. New project announcements rose to a three-quarter high of Rs. 11.2 trillion in Q3 FY2026, up from Rs. 9.3 trillion in Q2 and marginally higher than Rs. 11.0 trillion in Q3 FY2025. The private sector accounted for Rs. 9.6 trillion of new announcements, the highest for any third quarter, while government sector proposals remained muted at Rs. 1.6 trillion.
Project completions slowed to a four-quarter low of Rs. 1.8 trillion in Q3. However, the average run rate of completions in the first nine months of FY2026 stood at Rs. 2.1 trillion, higher than the Rs. 1.6–1.9 trillion range seen during the corresponding periods of FY2022 to FY2024. With Rs. 6.4 trillion worth of projects commissioned so far in FY2026, close to the full-year total of Rs. 6.5 trillion in FY2025, Icra expects total completions this year to rise to Rs. 8.0–9.0 trillion, though still below the Rs. 9.6 trillion recorded in FY2024.
In the housing segment, sales volumes in the top seven cities declined 5.4 per cent year-on-year to 153.9 million square feet in Q3 FY2026, trailing the previous quarter by 1.0 per cent amid lower launches. Icra expects area sold to contract by 0–3 per cent to 620–640 million square feet in FY2026 before rising modestly by 1–4 per cent to 645–655 million square feet in FY2027 as sales velocity stabilises.
The agency said recent goods and services tax rate cuts on key inputs, income tax relief and a cumulative 125 basis points reduction in the policy repo rate are likely to aid the sector. Continued focus on the Pradhan Mantri Awas Yojana-Urban in the Union Budget FY2027 is also expected to support demand for affordable housing.
Overall, Icra said the strong expansion in public capex, combined with easing tariff pressures, augurs well for a broader-based revival in investment activity in FY2027, even as private capital expenditure remains sectorally uneven. |
