Capital Formation: March spending binge salvages states’ capex in FY21

Clearly, additional transfers from the Centre by way of Rs 45,000 crore as tax devolution in excess of the Revised Estimate from the divisible pool due to improved tax receipts in March, eased the stress on states’ finances a bit.

In April-May of the current financial year, Railways was the largest investor by deploying capex of about Rs 28,000 crore or 13% of its annual target of Rs 2.15 lakh crore.

State governments have acquitted themselves well in arresting an anticipated decline in capital expenditure in FY21, despite an unprecedented fall in tax revenues over two successive years and a pressing need to step up revenue spending, especially on healthcare, due to the pandemic.

According to data gathered by FE of 15 major states, they reported combined capex of Rs 3.26 lakh crore in the last financial year, up 2% on year, compared with a negative growth of 6% recorded in FY20. Of course, the aggregate capex growth of all states was 2% higher in FY20 over FY19, as per data released by RBI.

What helped the 15 states to improve their capex performance from the much lower levels seen till the third quarter of the fiscal was a steep 31% jump in such spending in March. An earlier study by FE of 16 states showed that their combined capital expenditure stood at Rs 2.16 lakh crore in April-February of FY21, down 18.5% on year.

Market borrowings by these states surged 63% to Rs 6.63 lakh crore in the last fiscal year,as compared to 11% rise witnessed in FY20. The Centre had raised the borrowing limit for states to 5% of GSDP (including 1 ppss conditional upon certain achievements, including specified reforms) for FY21; most states utilised this facility, though not to the full extent.

Had the Centre not given the states extra borrowing leeway and largely protected the GST compensation even while being itself hit by the pandemic blues, the states could not have stepped up asset-creating expenditure. Of course, the Centre has appropriated a larger part of the available fiscal resources in the last two years by using the cess/surcharge route, especially by hiking such imposts on auto fuels to the detriment of states’ fiscal powers.

Among the 15 states, capex by Kerala rose at the steepest rate of 58% on year in FY21, followed by Andhra Pradesh (56%), Tamil Nadu (30%) and Karnataka (26%).

However, for the fourth year in a row, aggregate capital expenditure by state governments is seen to have missed the annual targets. As regards the 15 states reviewed by FE — Uttar Pradesh, Maharashtra, Tamil Nadu, Andhra Pradesh, Madhya Pradesh, Karnataka, Rajasthan, Gujarat, Odisha, Telangana, Kerala, Punjab, Haryana, Chhattisgarh and Uttarakhand — their capex was down 31% in FY21 from the budget estimate (BE) announced at the start of the year.

According to the RBI’s customary study of state finances, the total capex roll-out by all states stood at Rs 4.97 lakh crore crore in FY20, down 20% from the BE of Rs 6.22 lakh crore.

Clearly, additional transfers from the Centre by way of Rs 45,000 crore as tax devolution in excess of the Revised Estimate from the divisible pool due to improved tax receipts in March, eased the stress on states’ finances a bit.

Despite extra central tax devolution, tax revenues of the 15 states were down 6% on year at Rs 13.94 lakh crore while borrowings shot up by 63% to Rs 6.63 lakh crore in FY21. The tax revenues of these states were 23% lower than the BE. Borrowings by these states were 104% of FY21 target compared with 70% of the respective target achieved in FY20.

The states incurred much additional revenue expenditures in last fiscal year due to the welfare steps taken as Covid relief. The 15 states reviewed saw their revenue expenditure as well as total expenditure rising 5% each on year in FY21. These states’ total expenditure achievement was 83% of target in FY21, better than 81% of target achieved in FY20.

The FY21 capex target for all states as per their BEs was Rs 6.5 lakh crore, up 30% on year. State capex is believed to have a greater multiplier effect on the economy, than such spending by the Centre and public sector undertakings.

While states fell substantially short of target, the Centre has achieved 97% its FY21 revised capex target of Rs 4.39 lakh crore (up 26% on year).

In recent months, the Centre has indeed stepped up spending to support the economy and also successfully roped in CPSEs in the venture, but the revenue-starved state governments could not maintain their momentum.

This amounted to bucking the trend of several immediate past years, when states had turned in a better show in fiscal consolidation and capital spending, maintaining a public capex ratio of 5:3.6:3.4 (states, CPSEs and Centre in FY20).

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