State capex to will be main growth engine in India as government expands capex for infrastructure and manufacturing initiatives in Budget 2026

Doubling down on state-led growth model: India’s Union Budget 2026-27, presented by finance Minister Nirmala Sitharaman on Sunday, kept the state-led growth strategy intact, raising public capital expenditure to INR 12.2 tn (USD 133 bn) for FY 2027 (starting in April) from INR 10.9 tn (USD 119 bn) in the current fiscal. Government spending will continue to be the primary engine of the economy, relying on massive infrastructure outlays and a patchwork of sector-specific incentives to drive manufacturing but without introducing a new growth framework.

(** Tap or click the headline above to read this story with all of the links to our background and outside sources.)

The approach reflects continuity rather than a shift in growth strategy, Economist Salman Anees Soz told EnterpriseAM. “The government is still leaning on the same two pillars — public capital expenditure to hold up growth, and a manufacturing narrative to signal long-term competitiveness. India still needs infrastructure and deeper supply chains. But there is no new growth model in this Budget,” Anees told EnterpriseAM, adding that the announcements read as sectoral allocations rather than a unified economic strategy.

Manufacturing push without a private-investment engine

Key initiatives to bolster manufacturing:

• An enhanced outlay to INR 400 bn (USD 4.8 bn) has been announced for the electronics components manufacturing scheme announced in 2025.
• The budget allocated an INR 100 bn (USD 1.2 bn) for a new scheme that envisions a global biopharma manufacturing hub in India.
• The government has also announced the second phase of its semiconductor manufacturing scheme to “to produce equipment and materials, design full-stack Indian IP, and fortify supply chains.”
• Rare earth corridors: A proposal to establish dedicated corridors in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu to promote mining and processing of rare earth minerals. This builds on the existing programs on critical minerals and expands spending on recycling initiatives.
• For textile manufacturing, the government will provide support capital for machinery and tech upgrades, while continuing work under its earlier textile park scheme, which includes seven integrated textile manufacturing hubs. Duties on shuttle-less looms have been reduced to nil.
• Data centre build out: A 20-year tax holiday for foreign companies providing global cloud services using Indian data centres as well as simplified tax compliance norms.

Private engine missing: While the government is increasing its capital push in manufacturing, a credible second engine of growth is missing — “without a serious push to improve private investment conditions and productivity at scale, public spending and selective industrial schemes cannot carry growth on their own,” according to Anees.

The lack of an integrated industrial strategy is most visible in India’s approach to critical and strategic supply chains, Anees argues, stating that reducing India’s dependence on China in critical minerals “requires far more than corridor announcements.”

As a result, private investment has not picked up meaningfully for many years. “There has been some improvement in parts of the private sector, but nothing comparable to earlier investment cycles. India is sending more investment abroad than it is receiving. That reflects confidence and return issues in the domestic investment climate.” Anees said.

Customs reform

The budget also announces trade-facilitation measures including a new Customs Integrated System, a single digital clearance window, risk-based audits and expanded non-intrusive scanning. These measures amount to incremental modernisation rather than a full overhaul of the customs architecture.

“India’s biggest challenge remains inconsistency and discretionary enforcement. What is permitted at one port often becomes a dispute at another. That unpredictability is far more damaging than the absence of technology,” Anees pointed out.

Gift City tax holiday extension

The government has doubled the tax holiday for businesses establishing operations in Gujarat’s International Finance Tec-City (Gift City) to 20 years. Many Gulf based companies including SWFs, ins. firms and banks will benefit with an extended tax holiday as more firms line up to establish offices in the Gift city.

The missing reform agenda

The main gap in the budget is the absence of an economy-wide reform agenda focused on private-sector growth. “Instead of setting up multiple committees for different sectors, the country should establish a “high-level, cross-sector commission focused specifically on bolstering private-sector growth and job creation,” Anees said.