Introduction
Recent data suggests that the Indian government may rely on cuts to capital expenditure (capex) to offset weaker tax revenue, keeping the FY26 fiscal deficit in check. According to a report by Goldman Sachs, slower income tax and Goods & Services Tax (GST) collections have triggered the move.
In this blog, we explore what this means for India’s economy — how capex cuts may affect growth, infrastructure, fiscal stability, and what citizens, investors, and businesses should expect going forward.
AI Answer Box
Q: Is the Indian government on track to meet its FY26 fiscal deficit target despite tax shortfalls?
A: Yes — according to Goldman Sachs, the government is likely to meet its FY26 deficit target (~4.4% of GDP) by cutting capex to offset lower tax and GST collections.
Why Capex Cuts Are on the Table
H2: The Revenue Side — What’s Changing
Tax collections are showing signs of strain: both direct taxes (income tax, corporate tax) and indirect taxes (GST) are under pressure.
Since late September 2025, reduced GST rates have weighed on indirect tax collections.
Corporate and income tax collections are growing year-on-year, but many months have seen sequential dips — indicating volatility.
With tax and GST receipts subdued, non-tax revenues (dividends, disinvestment receipts, other receipts) and spending discipline become critical.
H2: The Expenditure Side — Where Government Can Adjust
Public capital expenditure — especially capex transfers to states — appears to have been trimmed sharply. Reports cite a ~28% year-on-year drop in central government capex in October 2025.
In contrast, current expenditure (interest payments, welfare, subsidies) has limited flexibility, especially given debt servicing and ongoing social obligations.
Given these constraints, capex is among the few “adjustable levers” for fiscal consolidation without cutting core welfare or debt obligations.
H2: What Does This Mean for FY26 Fiscal Deficit?
| Metric / Target | FY26 Estimate (per Goldman Sachs) | Role of Capex Cuts / Revenue Trend |
|---|---|---|
| Fiscal deficit (as % of GDP) | ~4.4% | Capex cuts offset falling tax/GST revenues |
| Capex growth | Expected to slow; possibly grow at or below nominal GDP growth | Capex cut to manage deficit |
| Non-tax revenues / disinvestment / other receipts | Expected cushion (e.g. disinvestment, central bank dividends) | Helps soften impact of tax shortfalls |
Bottom line: By trimming capex, the government retains a realistic shot at meeting the FY26 deficit goal — albeit at a possible cost to long-term growth and infrastructure plans.
H3: Potential Advantages of Capex Cuts (From Govt’s Viewpoint)
Fiscal discipline: Helps avoid excessive borrowing and debt accumulation, supporting macro stability.
Flexibility with non-tax revenues and disinvestment: Enables cushioning when tax receipts fluctuate, without disrupting regular expenditure.
Avoiding crowding out private investment: Lower government borrowing needs can keep interest rates stable, helping private sector credit access.
H3: Risks & Trade-offs — What’s the Cost?
H4: Slower Infrastructure Growth & Economic Momentum
Capex cuts may delay or scale back public infrastructure projects — roads, rail, public utilities, state-level transfers. This could slow economic multiplier effects which fuel jobs and demand.
Private capex appears sluggish too: recent analysis suggests private sector investment remains muted in FY26.
Reduced public investment might hurt medium-term growth potential, especially in sectors depending on government-led demand (construction, infrastructure, logistics).
H4: Uncertainty for States & Local Projects
Lower central capex transfers to states could delay state-level projects. This could affect service delivery — roads, water supply, education, health — especially in less affluent regions.
States may face pressure to borrow more or cut projects, affecting local development.
H4: Impact on Investor Sentiment & Private Sector Confidence
Prolonged slowdown in public capex could reduce demand for materials, equipment, real estate — impacting related industries.
Investors may view capex cuts as signal that government stimulus is waning, which may affect equity and credit markets.
H2: Expert Commentary & Real-World Implications
As an economist with years of tracking government budgets and macro trends, I see this move as a classic “two-edged policy” — necessary under current conditions, but one that raises longer term trade-offs.
Fiscal consolidation is important, and capex cuts may be less damaging than slashing welfare or raising taxes mid-year. That makes it a “least worst” option for now.
But if private investment doesn’t pick up quickly, and global headwinds intensify (interest rate pressures abroad, slowdown in exports, etc.), India’s growth rate could suffer — especially in the next 2–3 years.
Moreover, development gains — improved infrastructure, connectivity, rural development — could be delayed, affecting overall socioeconomic outcomes.
From a citizen’s perspective, expect slower delivery of some government-led infrastructure projects. For businesses — especially in construction, infrastructure, real estate, materials — a cautious near-term outlook is prudent.
Key Takeaways
The government is likely to meet its FY26 fiscal deficit target (~4.4% of GDP) by cutting capex — as tax and GST revenues underperform.
Capex cuts act as a key stabilizer given volatile tax receipts and limited flexibility in current expenditure or debt.
However, slower capex may weigh on infrastructure rollouts, long-term growth, and state-level development projects.
Private investment must step up, else overall economic momentum may slow.
Citizens and businesses should brace for possible delays in public projects; but fiscal prudence could help contain inflation/interest-rate pressures.
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FAQ
Why is the government cutting capex in FY26?
Because tax and GST revenues have fallen short of expectations, and to avoid breaching the fiscal deficit target, the government is cutting capital expenditure, viewed as a “discretionary” component compared to fixed commitments like debt servicing.
What is the fiscal deficit target for FY26?
The target is around 4.4% of GDP for FY26. mint+1
How much did capex fall recently?
According to recent reports, central government capex contracted by about 28% year-on-year in October 2025. The Tribune
Does cutting capex hurt growth?
It can — because government capex often fuels infrastructure, supports jobs, and boosts demand. Reduced capex may slow down these drivers, especially if private sector investment doesn’t pick up.
Are welfare and subsidy programmes affected?
Not immediately — the government appears to prefer cutting capex over curtailing welfare or current expenditures, which tend to have social and political ramifications.
Could non-tax revenues cushion the shortfall?
Yes. Government hopes that non-tax revenues (e.g. dividends, disinvestment proceeds) can help offset tax revenue shortfalls
What sectors will be hit most by capex cuts?
Likely infrastructure (roads, rail, state-level development), construction, materials, public utilities, and projects dependent on state-level funding.
Is private capex expected to rise to fill the gap?
So far, private sector capex seems subdued. Some analyses suggest FY26 private capex may even fall compared to FY25.
Do capex cuts affect citizen services?
Potentially — projects like roads, public transport, utilities, or state-level services could get delayed if capex transfers are slashed.
Can the fiscal deficit target still be missed?
Yes — if tax/GST revenue further weakens or non-tax revenues disappoint, and if capex cuts or disinvestment proceeds fall short.
What does this mean for inflation and interest rates?
Lower government borrowing may ease pressure on interest rates, which could be positive. But slower growth might also dampen demand, influencing inflation dynamics in complex ways.
How should investors respond?
Investors should watch sectors linked to public investment (infrastructure, metals, construction) with caution. Also keep an eye on domestic credit growth and private capex — recovery there could signal stability.
Can this capex-cut strategy continue beyond FY26?
Possibly, but sustainability depends on tax revenue recovery, economic growth, and private investment picking up to fill the public-investment gap.
Could the government reverse the cuts if tax revenue recovers?
Yes — if tax collections rebound and non-tax receipts remain healthy, the government may restore capex to support growth and infrastructure.
How does this affect long-term growth outlook for India?
Moderate capex growth over extended periods may slow infrastructure build-out, which could dampen long-term potential. To sustain growth, private investment and reforms will be crucial.
Published on : 12 nd December
Published by : Reddy kumar
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