The Centre’s capex has risen continuously from 1.7% of gross domestic product (GDP) during fiscal 2016-2020 to 3.1% of GDP budgeted for this fiscal. This has been spent on rural roads, highways, airports and railways to improve physical connectivity, reduce logistics costs and enhance competitiveness. As a result, gross fixed capital formation has improved from 27.3% of GDP in fiscal 2021 to 30.1% in the current one, underscoring improved quality of spending. The budgeted capex for the next fiscal, at ₹11.21 trillion, marks a 10% growth.

Also Read | Budget 2025: Income tax cuts extend FMCG stocks’ winning streak

Not a big change, but the leg-up to consumption from a reduction in taxes can offer some support to capex by improving domestic demand and creating conditions for fresh investments—a de facto baton push to the private sector.

Increasing discretionary incomes will help households spend more on goods and services, particularly fast-moving ones, consumer durables and two-wheelers, all of which could experience a surge in demand.

Also Read | Budget 2025: How compliance burden of senior citizens has been eased

Three steps taken by the government in recent times have been crucial to the Indian economy’s forward march. One, the heavy infrastructure spending has had a multiplier effect on commodity sectors such as steel and cement, evident in the decadal-high utilization last fiscal. Over the next four fiscals, we estimate capacities in these sectors will increase by 30%. The continuing build-out will likely reduce India’s logistic cost as percentage of GDP by about 400 basis points to 9-10% over the medium term, in sync with the government’s objective of lowering the cost of manufacturing in India.

Two, direct interventions such as the production linked incentive (PLI) schemes and the National Semiconductor Mission have generated strong investment interest, fostering domestic production, attracting foreign investment, and promoting a more competitive manufacturing landscape.

Also Read | Union Budget lifts restrictions on claiming two properties as self-occupied

Third, the government has emphasised the creation of an ecosystem to reduce cost disparity in manufacturing, addressing up to 20% cost disadvantage compared with imports from China in sectors such as electronics, textiles and automobile manufacturing.

As India undergoes a manufacturing renaissance, shifting from traditional sectors to high-technology ones such as solar photovoltaic, lithium-ion batteries and semiconductors, emerging sectors will drive capex growth.

The government’s move to promote clean technology manufacturing will help India transition towards sustainable sources of energy. The continuation of last fiscal’s duty cuts, renewed focus on sectors such as solar, battery storage, wind and high-voltage transmission will support backward integration efforts. In a calibrated manner, joint action through non-trade barriers and trade policy along PLI incentives give visibility to private sector for long-term investments.

In addition, the enhancement of credit guarantee covers for micro enterprises from ₹5 crore to ₹10 crore is expected to play a vital role in addressing the considerable funding gap of ₹20-25 lakh crore faced by MSMEs, thereby helping to fulfil their credit requirements and foster growth in the sector. The MSME sector saw a significant 22% surge in bank credit on-year last fiscal, outpacing the 17.5% growth seen across all categories. Additionally, the guarantee amounts under the CGTMSE scheme saw a substantial 51% rise.

Among other factors, the onset of tariff wars has heightened concerns about excess capacity in China and the potential for dumping of goods. That could make the private sector more cautious. There are admirable efforts to rationalise the customs duty structure for industrial goods-reducing duties on inputs and raising them on final products in line with recent announcement of PLI to promote domestic value addition and investment in electronics.

The results of such policies are becoming increasingly evident, reflecting the government’s efforts to stimulate the manufacturing sector, although the fast-evolving global, technological and commodity dynamics will require close monitoring. Increasing global trade frictions are another potential challenge that can create disruptions. India won’t be immune to them. So far, government policies, capex incentives and a favourable business cycle have been supportive. For capex to sustain in the long run, the Centre needs to ensure continuous improvement in the ease of doing business and India’s logistics efficiency quotient.

Amish Mehta is the managing director and CEO of Crisil Limited.