Dalal Street expectations suggest the government is likely to stick to fiscal discipline, leaving limited headroom for a broad-based capex push. With the fiscal deficit trajectory largely locked and tax collections under pressure, any incremental spending is expected to be selective rather than expansive. This shifts the focus from headline numbers to sectoral allocation and intent, with defence, railways, and a handful of infrastructure-linked segments likely to absorb a disproportionate share of attention.
Defence appears best positioned, supported by emergency procurement in FY26, sustained indigenisation push and a likely step-up in allocations for allied industries. Railways, particularly safety, signalling and rolling stock, remain in favour, even as broader infra segments such as roads and housing risk seeing flatter allocations.
Defence stands out as the clear winner. Emergency procurement added Rs 40,000 crore in FY26, and Motilal Oswal expects defence spending to jump 15% in FY27 from an estimated Rs 1.8 lakh crore base. Allied industries, shipbuilding, electronics, and critical minerals, are set to ride the indigenisation wave as the government doubles down on strategic resilience.
Railways will hold ground, but only in pockets: Safety, signalling, and rolling stock remain priorities. The rest—roads, housing, and broader rail segments that made up 47% of FY26’s capex allocation—face a subdued outlook. BofA Securities’s economists Rahul Bajoria and Smriti Mehra warn that “allocation could continue to remain subdued for Roads, Railways (remaining sub-segments) and Housing.”
Capex growth itself is expected to track nominal GDP, rising a modest 9-10% to Rs 12.4-12.5 lakh crore in FY27, or roughly 3.1-3.2% of GDP. That’s a sharp deceleration from the 40% year-on-year surge in the first half of FY26, when spending was front-loaded post-election.
“Capital spending now has normalised over the last two months, tracking +28% YoY FYTD,” Bajoria and Mehra noted. “We expect capex slightly overshooting the budget number on account of additional spending on defence.”Motilal Oswal expects higher allocations for defence and allied industries, infrastructure-linked manufacturing, pharma, power, nuclear, electronics, critical minerals, and trade tariff-affected labour-intensive sectors, while “revenue expenditure is likely to be tightly managed, with limited growth in subsidies and non-essential spending.”
The fiscal math offers little wiggle room. Despite hitting the 4.4% deficit target in FY26, navigating low nominal GDP growth, deep tax cuts, and controlled subsidies thanks to lower energy prices, the government has no appetite for populism. BofA expects the deficit to edge down marginally to 4.3% in FY27, with subsidy bills moving sideways at best.
This marks a pivot from the easy capex rally of 2022-24, when government spending lifted all boats. What follows is a selective regime where only the most strategically aligned sectors, like defence, select rail capex, ship-building may get oxygen.