While the Centre will miss its fiscal deficit target even after cutting capital expenditure in FY18, the states are also compressing capex to finance rising revenue spending and adhere to their deficit targets. The combined capital expenditure of 23 states stood at Rs 2.04 lakh crore in April-December this fiscal, down 2% from Rs 2.08 lakh crore a year ago. While the overall capex decline is modest, the reduction capex is sharp in the case of some states, notably Uttar Pradesh (UP) and Punjab. UP\u2019s capex fell 61% to Rs 18,309 crore in April-December FY18 from Rs 47,447 crore a year ago. UP has set a capex target of Rs 53,251 crore for FY18. Similarly, Punjab\u2019s capex declined by 62% to Rs 1,278 crore from Rs 3,391 crore a year ago. Bihar, Rajasthan, Tamil Nadu and Madhya Pradesh, too, saw a decline. However, some states such as Chattisgarh, Haryana, Andhra Pradesh, Karnataka and Maharashtra saw improvement in capex in the first nine months of FY18. However, the achievement of many states at December-end were much below 50% of the respective full-year targets. Even though Maharashtra reported a capex of Rs 12,952 crore in April-December this year compared to Rs 10,991 crore a year ago, the achievement is only 34% of the FY18 target of Rs 38,142. Similarly, Karanataka has achieved only 48% of the full-year target of Rs 32,033 crore. It is to be noted that UP, Punjab, Maharashtra, Rajasthan and Karnataka have announced farm loan waivers, implementation of which could further slow down capex by these states. It is estimated that, loan waivers at the all-India level could be around Rs 2 lakh crore. UP, which does not have a fiscal space, is understood to have slashed capital expenditure to accommodate the farm loan waiver, instead of borrowing from market. Similar trend could emerge in other states. Total borrowings by 23 states declined 9% year-on-year while their combined fiscal deficit fell by 24% in the first nine months of the current financial year. The combined capital expenditure of states is projected to be about 2.79% of gross state domestic product (GSDP) or about Rs 4.7 lakh crore in 2017-18 against the revised estimate of 2.77% of GSDP or about Rs 4.2 lakh crore in the previous year. In revised estimate for 2017-18, the capital expenditure of the Centre was cut by Rs 36,356 crore to Rs 2.73 lakh crore to accommodate higher revenue expenditure such as salary costs. With private investments still weak, investments by the Centre, state governments and, more than them, by PSUs and departmental undertakings, have enabled a reasonably strong public capex over the last couple of years. However, brakes have now been applied. Gross fixed capital formation (GFCF) is expected to grow 4.5% this fiscal, compared with 2.4% last year, according to the Central Statistics Office (CSO) forecast, indicating that the spending by the public sector is helping arrest the decline in GFCF as percentage of the gross domestic product. Besides farm loan waivers, the UDAY scheme for the power discoms have increased the burden on state finances. The revenue expenditure of the 23 states rose 7% to Rs 14.56 lakh crore in April-December as their annual interest expenditure shot up by 14%. The tax revenues of these states (own and devolution from the Centre) grew by 9% during the period.