States are expected to increase capital expenditure by 10-12 per cent to about Rs 8.5 lakh crore in FY27, according to a Crisil Ratings report, but the significance of the projection lies less in the headline increase than in where the money is expected to go. Urban infrastructure—including water supply, sanitation, housing and urban development—is forecast to record high double-digit growth, placing the quality of state-level implementation at the centre of India’s next infrastructure cycle.
The projection marks a faster pace than the 8.6 per cent growth in state capital outlay recorded in the previous fiscal year. Crisil estimates that states will achieve around 84 per cent of their aggregate budgeted capital outlay in FY27, compared with 82 per cent in the preceding fiscal year. The figures point to both a larger budgetary ambition and a modest improvement in the conversion of allocations into actual spending.
That distinction matters particularly for urban infrastructure. A budget provision can indicate policy priority, but it does not by itself create a water network, expand sanitation coverage, complete an affordable housing project or improve municipal service delivery. The report’s forecast therefore reflects two linked developments: more fiscal space for states and a requirement that departments and implementing agencies release, utilise and complete projects at a faster pace.
The principal financial support identified by Crisil is the Special Assistance to States for Capital Investment, or SASCI, scheme. Allocation under the scheme is expected to rise 33 per cent to Rs 2 lakh crore in FY27. Introduced in FY21, SASCI provides states with 50-year interest-free loans in addition to their normal borrowing limits. This structure gives states additional room to finance capital projects without using the borrowing headroom available for their regular expenditure.
The scheme is especially important because state capital spending often competes with recurring obligations such as salaries, subsidies, welfare programmes and interest payments. A long-tenure, interest-free loan tied to capital investment can help separate infrastructure financing from those immediate pressures. Crisil Senior Director Anuj Sethi said the scheme had demonstrated strong utilisation, which should help translate the additional funding into capital spending.
However, the same design also makes compliance and execution important. Crisil said timely fulfilment of SASCI-linked conditions and efficient fund utilisation would be critical to meeting the spending targets. The report does not establish that every state or every urban project will benefit equally. Instead, it identifies a funding channel whose impact will depend on whether states meet the conditions attached to it and whether the money moves beyond budgets and departmental releases into physical implementation.
The early spending data shows why the second half of the fiscal year will be important. State capital outlay grew 8.8 per cent year-on-year in the first five months of the fiscal year, while SASCI disbursements had reached only around 25 per cent of the budgeted allocation by September 2026. Spending is expected to gather pace in the second half as tied allocations are released. This creates a concentrated implementation window for infrastructure agencies, particularly those responsible for projects that require land, tendering, contracting and interdepartmental coordination.
Urban infrastructure is forecast to be the leading growth segment. The water supply, sanitation, housing and urban development grouping—referred to in the report as WSS-H-UD—is expected to post high double-digit growth, supported by higher state allocations and central schemes. Aditya Jhaver, Director at Crisil Ratings, said urban infrastructure would drive capital spending.
The breadth of this grouping is significant. Water supply and sanitation projects affect daily service delivery, while housing and urban development spending shapes the expansion and formalisation of the built environment. Treating these areas as a single spending category can reveal the overall scale of urban emphasis, but it also means that the aggregate figure does not show how much will go to each service. The supplied report does not provide a state-wise or sub-sector-wise breakup, so the projected growth should not be read as a guarantee of comparable gains across water, sanitation, housing and urban development.
Transport will remain the largest component of aggregate state capital outlay. Roads and bridges are expected to account for around one-fourth of total capital expenditure, with growth in the high single digits. This creates a different spending pattern from the urban infrastructure forecast: urban services may grow faster, but transport infrastructure will continue to command the largest absolute share of the capital investment programme.
That balance is central to how states build cities. Roads and bridges can improve connectivity and support the movement of people and goods, while water, sanitation and housing determine whether urban growth is serviced and liveable. The Crisil projections suggest that both sides of this infrastructure equation will receive attention, although the report does not provide enough detail to assess whether allocations are integrated at the project or metropolitan level.
Irrigation spending is expected to grow at a low single-digit rate because some states have reduced allocations and the sector is facing a high base. This divergence shows that the projected rise in total capital expenditure will not be evenly distributed across sectors. Higher aggregate spending can coexist with slower investment in individual areas, depending on state priorities, the existing project pipeline and the fiscal pressures facing each government.
The revenue side of state finances provides part of the explanation for the projected increase. Revenue receipts are expected to grow around 0.75 per cent faster than revenue expenditure, supported by GST collections and tax devolution from the Centre. Crisil expects this to keep the absolute revenue deficit broadly stable. A stable revenue deficit does not remove fiscal pressure, but it can help states preserve room for capital spending if receipts perform as projected.
The forecast assumes nominal gross state domestic product growth of about 13 per cent in the current fiscal year, compared with 8.9 per cent in the previous fiscal year. Because the projection is based on nominal growth, it includes both changes in real economic activity and prices. The assumption is therefore an important condition underlying the spending outlook, rather than a measure of infrastructure delivery itself.
Several constraints could weaken the expected increase. Higher borrowing costs would make non-SASCI financing more expensive. Weaker revenue growth could reduce the room available for capital outlay, while increased welfare expenditure could place additional pressure on state budgets. These risks are particularly relevant to urban infrastructure because many projects require spending over several years, and delays in one financial period can affect procurement, construction schedules and subsequent allocations.
The institutional challenge is not limited to state finance departments. Urban projects typically require coordination among state departments, urban local bodies, development authorities, utilities and contractors. The report’s emphasis on conditions and fund utilisation indicates that the next stage will depend on administrative execution as much as on the availability of funds. The supplied material does not identify individual city agencies or project-level bottlenecks, but it makes clear that disbursement alone will not determine whether the projected capital outlay is achieved.
SASCI’s role also shows how the Centre is influencing the composition and pace of state infrastructure spending without replacing state responsibility for implementation. The scheme adds financing capacity above normal borrowing limits, while states remain responsible for fulfilling linked conditions and using the funds efficiently. In urban development, this arrangement can increase the scale of available capital, but it also ties delivery to compliance, release schedules and the readiness of state and local agencies to execute eligible projects.
The available numbers present a cautiously positive spending picture: total state capital outlay could reach Rs 8.5 lakh crore, budget achievement could rise to 84 per cent, SASCI funding could increase to Rs 2 lakh crore, and urban infrastructure could record high double-digit growth. Yet the same evidence points to a delivery gap that remains unresolved. Only about one-fourth of the budgeted SASCI allocation had been disbursed by September 2026, and the expected acceleration depends on a stronger second-half performance.
For cities, the larger question is whether a higher volume of state capital expenditure will produce more connected and reliable urban systems, or simply a larger pipeline of separately funded projects. The report confirms the scale and direction of the expected spending, but it does not establish outcomes such as improved water supply, sanitation access, housing completion or reduced travel times. Those results will depend on project selection, institutional coordination, timely releases and utilisation.
The next evidence to watch is therefore not only the final expenditure number. It is the pace of SASCI disbursement, the extent to which states meet the scheme’s conditions, the distribution of spending within the WSS-H-UD segment and the implementation performance of roads, bridges and urban projects. Crisil’s forecast places urban infrastructure at the centre of FY27 capital spending; the fiscal year’s results will show whether that priority becomes visible in the services and networks used by urban residents.
