India could be on the verge of a surge in mergers and acquisitions (M&A) after a slow few quarters, thanks to signs that the government is likely to boost capital expenditure in the next fiscal year to drive economic growth.

With an expected increase in government spending through a higher capital outlay in the upcoming Union Budget, the country may attract a wave of foreign investments and M&A activity in the coming financial year. 

Infrastructure & Economic Outlook

• The government is prioritizing infrastructure development, with a focus on increasing renewable energy-based power generation.
• This marks a recovery from the weak economic performance in recent quarters.

Capital Expenditure & Budget Allocation

• In July 2024, the government announced a record ₹11.1 trillion capital expenditure—a 17% increase from 2023-24.
• Nearly 3.4% of GDP has been allocated for infrastructure in FY 2024-25.
• Challenges in sustaining spending momentum due to:
  • Delays in budgetary provisions.
  • Rising fiscal deficit.

Decline in Capital Utilization

• Only 46.2% of the budgeted funds were utilized, down from 58.5% in the previous year.
• To meet the ₹11.1 trillion target, the government needs to increase capital expenditure by 65% YoY between Dec 2024 - March 2025.
• This requires an accelerated spending rate of ₹1.5 trillion per month, which is difficult given the fiscal constraints.

Challenges Impacting Economic Growth

• Apart from lower government spending, other factors dampening business sentiment include:
  • High-interest rates
  • Weakening rupee
  • Geopolitical uncertainties
  • Increased regulatory scrutiny
• These factors have led to lower economic growth forecasts for India.

Expected Revival in Mergers & Acquisitions (M&A)

• M&A activity may pick up after a slow few quarters as capital expenditure increases.
• "The government is likely to increase funding for."
  • Power generation & distribution
  • Data centers
  • Railways
  • Defense
• More projects could be announced while stalled projects may be revived, benefiting private sector infrastructure companies.

Impact on Private Sector & Investment

• Companies in infrastructure may see an increase in government orders, leading to:
  • Expansion of order books.
  • Need for additional funding.
  • Higher stake sale activity in FY 2025-26 to secure financing.

Energy Sector & Clean Energy Push

India is reducing reliance on imported fossil fuels, boosting M&A activity in the energy sector.

Business Reforms & Foreign Investment

• Upcoming regulatory reforms are expected to improve the ease of doing business.
• Recent FDI relaxations in:
  • Retail
  • Aviation
  • Defense
• These moves are likely to attract more foreign investments.

Furthermore, India's M&A growth will gain momentum due to a young and growing population, ongoing regulatory improvements, and a surge in entrepreneurial ventures across key sectors like technology, healthcare, and infrastructure.

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