The Union Budget 2025 presents a strategic shift in capital expenditure allocation, moving away from broad-based spending to targeted sectoral investments. After experiencing significant momentum in the first half of FY26, the capex cycle has normalised, prompting investors to focus on specific policy signals and sectoral priorities. The government's commitment to fiscal discipline limits scope for expansive spending, creating a selective investment environment.

Defence Sector Leads Capex Growth

Defence emerges as the standout performer in the upcoming budget allocation. The sector benefits from substantial emergency procurement and sustained indigenisation initiatives that strengthen India's strategic capabilities.

Motilal Oswal expects defence spending to jump significantly, driven by the government's focus on strategic resilience and self-reliance. Allied industries including shipbuilding, electronics, and critical minerals are positioned to benefit from the indigenisation wave as policy emphasis shifts toward domestic manufacturing capabilities.

Railways Allocation Shows Mixed Outlook

The railways sector faces a differentiated approach with specific segments receiving priority treatment. Safety infrastructure, signalling systems, and rolling stock remain key focus areas, reflecting the government's commitment to operational efficiency and passenger safety. However, broader rail segments that constituted 47% of FY26's capex allocation are expected to see more restrained growth.

BofA Securities economists Rahul Bajoria and Smriti Mehra indicate that allocation for roads, remaining railway sub-segments, and housing could remain subdued in the upcoming budget cycle.

Overall Capex Trajectory and Fiscal Framework

Total capital expenditure growth is projected to align with nominal GDP expansion, showing significant moderation from previous periods. The spending pattern reflects a normalisation after the front-loaded approach adopted in early FY26.

Bajoria and Mehra noted that capital spending has normalised over recent months, tracking 28% year-over-year growth on a financial year-to-date basis. They expect capex to slightly exceed budget numbers primarily due to additional defence spending.

Sectoral Winners and Investment Focus

Motilal Oswal identifies several sectors positioned for higher allocations beyond defence. Infrastructure-linked manufacturing, pharmaceuticals, power, nuclear energy, electronics, and critical minerals are expected to receive enhanced funding. Trade tariff-affected labour-intensive sectors may also see supportive measures.

The approach represents a strategic pivot from the broad-based capex rally of 2022-24, when government spending provided widespread sectoral benefits. Revenue expenditure is expected to remain tightly managed, with limited growth in subsidies and non-essential spending, maintaining the government's fiscal discipline approach.

Market Implications and Outlook

The selective capex approach creates a differentiated investment landscape where strategically aligned sectors receive priority funding. Defence contractors, railway safety equipment manufacturers, and allied industries stand to benefit most from the targeted allocation strategy. The government's focus on fiscal consolidation while maintaining strategic investments reflects a balanced approach to economic management and national security priorities.

A senior industry leader has presented four strategic budget imperatives that could shape India's path toward building a future-ready economy. The recommendations, outlined by the Senior Vice President of Ficci and Chairman of The Sanmar Group, focus on comprehensive reforms spanning manufacturing, policy frameworks, and structural economic changes.

Building Self-Reliance Through Strategic Manufacturing

The first priority centers on reinforcing atmanirbharta by prioritizing strategic sectors critical for growth, competitiveness, and national security. The approach emphasizes a sector-specific, value-chain-driven manufacturing strategy designed to convert rising domestic consumption into local production and employment opportunities.

As India's consumer market expands, the strategic imperative involves meeting domestic demand through globally competitive domestic manufacturing. This requires targeted support for key value chains, enabling firms to scale, innovate, and integrate into global supply networks.

Manufacturing-Led Growth Strategy

The second imperative focuses on expanding manufacturing's contribution from approximately 17% of GDP to 25%, which is considered critical for employment generation. The manufacturing sector's growth creates a high multiplier effect, generating direct factory jobs while supporting employment across logistics, small firms, services, and regional supply chains.

The strategy requires a fundamental mindset shift to place manufacturing on the same strategic level as services. In an environment where trade is increasingly weaponized, tariff support becomes essential to protect India's SME backbone from unfair competition.

Enabling Policy Framework for Business Growth

The third priority addresses targeted interventions in taxation and trade facilitation to improve cost competitiveness and reduce uncertainty. A significant concern involves litigation reduction, particularly addressing the pendency of income tax appeals.

Key reform areas include:

• Time-bound disposal of cases, especially high-pitched assessments and matters with complete submissions
• Fast-track resolution system combining simplified case handling with detailed scrutiny of complex matters
• Enhanced RoDTEP scheme allocation to neutralize embedded taxes for exporters
• Long-term policy certainty to offset structural cost disadvantages

Next-Generation Economic Reforms

The fourth imperative encompasses customs rationalization initiated in previous periods, focusing on simplified tariff slabs and elimination of inverted duty structures. The reforms prioritize manufacturing scale, employment generation, and supply-chain resilience.

The tariff policy approach views customs duties as strategic policy instruments rather than ideological choices between protectionism and free trade. When tariffs catalyze investment and improve capacity utilization, income growth can outpace price increases, making moderate inflation economically manageable.

Strategic Implementation Framework

The comprehensive approach requires coordinated, whole-of-government action encompassing policy design, budgeting, and execution. Manufacturing expansion, supported by calibrated tariffs and reforms in land, labor, logistics, and regulation, can generate large-scale employment and expand the tax base.

While many implementation levers rest with states, the central government can play a catalytic role by linking financial assistance and borrowing capacity to state-level progress on land and power reforms. Deepening the corporate bond market remains essential to diversify financing options and improve access to long-term capital for growth-stage firms.

The budget presents an opportunity to consolidate and strengthen the foundations of India's economic advancement, focusing not merely on accelerating growth but sustaining it through enhanced productivity and competitiveness.