New Delhi: India’s capital expenditure (capex) contracted 23.4 per cent year-on-year in the third quarter of FY2025-26, as adjustments in central government spending moderated overall investment, a report by ICRA said on Sunday.

The slowdown in central capex is expected to temper economic growth momentum in Q3, although overall activity continues to benefit from festive-season demand and state-level capital expenditure expansion.

State governments showed stronger performance, with data from 24 states indicating a 21.9 per cent rise in combined capital outlay and net lending during the quarter, reversing a contraction recorded in Q2. In absolute terms, state capex increased to ₹2.1 trillion in Q3 from ₹1.8 trillion in Q2, approaching the Centre’s own capital spending levels.

Combined, central and state capital expenditure stood at ₹4.2 trillion in Q3 FY2025-26, slightly below ₹4.4 trillion in the same period last year. This follows a robust 16.7 per cent growth in Q2, signalling a normalisation after previous high momentum.

ICRA projected India’s GDP growth to ease to 7.2 per cent in Q3 FY2025-26, down from 8.2 per cent in Q2. Despite the moderation, growth is expected to remain above 7 per cent, supported by strong festive demand and benefits from GST rationalisation.

Aditi Nayar, Chief Economist and Head of Research & Outreach at ICRA, noted that estimating GDP growth under the new base year remains challenging. “The estimated sequential slowdown reflects an unfavourable base effect, contraction in government capital spending, subdued state revenue expenditure, and weak merchandise exports,” Nayar said.

On the revenue side, the pace of contraction in central non-interest revenue expenditure moderated to 3.5 per cent year-on-year in Q3, compared with an 11.2 per cent decline in Q2. State-level non-interest revenue spending grew by 2.7 per cent, though at a slower pace than in the previous quarter.

Overall, combined non-interest revenue expenditure of the Centre and 24 states recorded a marginal 0.3 per cent increase in Q3, reversing a slight decline seen in Q2.

IANS