Govt capex growth set to slow in 2H FY27, non-defence spending may fall 3%: Jefferies
Jefferies predicts a slowdown in non-defence capital expenditure for FY27 due to rising subsidies, energy costs, and fiscal deficit pressures.
The momentum of India's government capital expenditure is expected to hit a roadblock in the latter half of the 2027 financial year. According to a recent report by brokerage firm Jefferies, non-defence capital spending could see a decline of approximately 3 per cent during the September-March period, even as the year began with significant strength.
The Defence vs Non-Defence Tug-of-War
While the central government's capital expenditure showed a robust year-on-year increase of 18 per cent between April and August, a closer look reveals a significant imbalance. This growth was largely propelled by a massive 37 per cent surge in defence spending. In contrast, non-defence capital expenditure grew by a more modest 16 per cent during the same window.
Jefferies highlights a critical dilemma for policymakers: geopolitical tensions make it highly unlikely that defence budgets will be slashed to meet fiscal targets. Consequently, if the government needs to tighten its belt to maintain its fiscal deficit goals, the burden of cuts is likely to fall on non-defence projects.
Key Drivers of the Predicted Slowdown
Several economic factors are converging to limit the government's fiscal flexibility. The brokerage identified the following primary pressures:
- Rising Subsidy Burdens: Subsidy expenditure surged by 24 per cent year-on-year during the April-August period, a sharp departure from the 10 per cent decline originally envisioned in the Budget. This could add nearly Rs 1 trillion in pressure to non-capital spending.
- Energy and GDP Estimates: Higher energy costs and a revised nominal GDP estimate—projected to be around 3 per cent lower than previous forecasts—are expected to squeeze the government's available funds.
- Climate Risks: With rainfall running 13 per cent below normal, there is an increased risk of unplanned government spending on drought-related relief measures.
Fiscal Targets and Disinvestment Relief
Despite these headwinds, the government remains committed to its fiscal deficit target of 4.3 per cent of GDP. The borrowing calendar for the October-March period aligns with this objective.
There is, however, a silver lining in the form of revenue generation. Disinvestment receipts have already reached Rs 558 billion, representing about 70 per cent of the Rs 800 billion target. The potential privatisation of IDBI Bank, which is estimated to bring in roughly Rs 250 billion, could provide the necessary boost to help the government meet or even exceed its disinvestment goals.
In summary, while the first half of FY27 saw high growth, Jefferies expects the full-year non-defence capex growth to settle at 5 per cent, significantly lower than the 10.3 per cent increase originally estimated in the Budget.