Strengthening Capital Goods Sector

Syllabus: GS3/Economy

Context

• The Union Budget 2026-27 has estimated ₹12.2 lakh crore for public capital expenditure, from ₹2.63 lakh crore in FY18.

Key Announcements in Union Budget 2026-27 For the Capital Goods Sector

• Increased Public Capital Expenditure: Public capital expenditure proposed at ₹12.2 lakh crore in FY 2026–27 reinforcing infrastructure-led growth and supporting demand for capital goods across sectors such as transport, energy, urban infrastructure, and industry.
• Hi-Tech Tool Rooms for Precision Manufacturing: Establishment of Hi-Tech Tool Rooms by Central Public Sector Enterprises (CPSEs) at two locations, functioning as digitally enabled, automated service centres for design, testing, and manufacturing of high-precision components.
• Scheme for Enhancement of Construction and Infrastructure Equipment (CIE): Introduction of a dedicated scheme to strengthen domestic manufacturing of high-value, technologically advanced construction and infrastructure equipment.
  • It covers equipment such as lifts, fire-fighting systems, tunnel-boring machines, and machinery for metro and high-altitude road projects.
• Scheme for Container Manufacturing: Launch of a ₹10,000 crore scheme over five years to develop a globally competitive container manufacturing ecosystem in India.
  • Aims to reduce import dependence and support logistics, trade, and port infrastructure.
• Tax Incentives for Toll Manufacturing: Five-year income tax exemption for non-resident entities supplying capital goods, equipment, or tooling to toll manufacturers operating in bonded zones.
  • Intended to lower capital costs and promote contract manufacturing in India.
• Support for Energy Transition: Extension of basic customs duty exemption on capital goods used for manufacturing Lithium-ion cells for battery energy storage systems.
  • Strengthens India’s clean energy and energy storage ecosystem.
• Critical Minerals Processing: Customs duty exemption on capital goods required for processing critical minerals in India.
  • Aims to build domestic value chains and enhance energy and resource security.
• Continued Alignment with PLI and Competitiveness Schemes: Budget measures complement ongoing PLI schemes and Phase II of the Scheme for Enhancement of Competitiveness in the Indian Capital Goods Sector, supporting technology upgradation, testing infrastructure, and skill development.

What are Capital Goods?

• The term ‘Capital Goods’ means any plant, machinery, equipment or accessories required for manufacture or production, either directly or indirectly, of goods or for rendering services, including those required for replacement, modernisation, technological upgradation or expansion.
• These goods may be used in manufacturing, mining, agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture and viticulture as well as for use in the services sector.

Significance/Importance of Capital Goods in India

• Foundation of Industrial and Manufacturing Growth: Capital goods provide the essential machinery and equipment required for manufacturing across sectors such as steel, cement, automobiles, electronics, chemicals, and textiles.
  • Manufacturing GVA growth accelerated to 9.13% in Q2 FY26, supported significantly by capital goods availability and investment.
  • Capital goods enable modernisation, capacity expansion, and technological upgradation of industries.
• Driver of Infrastructure Development: Large-scale infrastructure projects i.e. roads, railways, ports, power plants, metros, and renewable energy facilities are heavily dependent on capital goods such as construction equipment, electrical machinery, and heavy engineering products.
• Strong Multiplier Effect on the Economy: The capital goods sector has a high multiplier effect, as investments in this sector stimulate demand across manufacturing, mining, agriculture, services and logistics.
  • The capital goods supply critical inputs to the entire production ecosystem, thereby boosting output, income, and employment across user industries.
• Indicator of Investment and Economic Momentum: Capital goods production and imports are widely regarded as barometers of investment activity in the economy.
  • Capital goods under the Index of Industrial Production (IIP) grew 8.1% YoY in December 2025.
• Support to Export Growth and Global Competitiveness: The expansion of domestic capital goods capacity has strengthened India’s export performance:
  • Capital goods exports increased to ₹33,356 crore in FY25 from ₹31,621 crore in FY24.
  • Technologies developed under government schemes have found markets in France, Belgium, and Qatar, reflecting rising global competitiveness.
• Enabler of Technological Advancement and Innovation: Capital goods play a crucial role in high-precision and high-technology manufacturing, and promote industry–academia collaboration and indigenous R&D.
• Catalyst for Employment Generation: Capital goods manufacturing is skill-intensive, generating direct and indirect employment across engineering, design, fabrication, testing, and maintenance.
  • Production Linked Incentive (PLI) schemes linked to capital goods have contributed to over 12.6 lakh jobs by September 2025.
• Strategic Role in Energy Transition and National Security: The sector supports India’s energy transition and critical mineral value chains by enabling:
  • Manufacturing of lithium-ion batteries and energy storage systems;
  • Processing of critical minerals through customs duty exemptions on capital goods;

Major Issues and Concerns

• Weak Private Sector Capital Formation: Private investment and corporate capex remains uneven and cautious in India, and concentrated in a few sectors, while MSMEs face limited access to long-term finance.
  • Crowding-in effects of public capex are slower than expected.
• Financing Constraints and Cost of Capital: Infrastructure financing literature highlights persistent asset–liability mismatches. Capital investment in India is affected by:
  • High cost of borrowing, especially for infrastructure and manufacturing projects;
  • Limited availability of long-tenure finance;
  • Overdependence on banks rather than deep corporate bond markets.
• Infrastructure Bottlenecks and Project Delays: Despite increased allocations, capital projects often suffer from land acquisition challenges, environmental and regulatory clearances, contract enforcement delays.
  • These factors increase project costs and reduce investment efficiency.
• Skill Gaps and Productivity Constraints: Capital-intensive sectors require highly skilled labour, but India faces:
  • Shortage of advanced technical and ‘new-age’ skills;
  • Mismatch between industrial needs and workforce capabilities.
• Regional and Sectoral Imbalances: Capital investment is unevenly distributed:
  • Concentrated in a few states and urban centres;
  • Limited penetration in eastern and north-eastern regions;
    • It leads to unequal development and underutilisation of national capacity.
• Dependence on Imports and External Vulnerabilities: India remains dependent on imported capital goods and advanced technologies, especially in electronics, renewable energy, and heavy engineering.
  • It exposes capital investment to exchange rate volatility and geopolitical risks.
• Sustainability and Environmental Concerns: Large-scale capital investment raises concerns about environmental degradation, carbon intensity of infrastructure, and climate resilience of assets.
  • Balancing growth with sustainability remains a key policy challenge.

Conclusion

• India’s capital goods sector is emerging as a central pillar of its investment-led growth strategy.
• The sector is strengthening industrial capacity, accelerating infrastructure creation, and reinforcing India’s long-term economic momentum and global competitiveness supported by sustained public investment, targeted policy interventions, and Budget 2026–27 initiatives.

Source: PIB