The state governments have slowed down their capital expenditure in the first six months of the current fiscal to accommodate higher revenue spending even as they continue to curb borrowings. The combined capex of nineteen states whose finances were reviewed by FE was up just 2% on year at Rs 1.67 trillion in April-September of the current fiscal. The growth was 80% in the year-ago period albiet on a favourable base.
These states had budgeted a capex of Rs 6.58 trillion for FY23, an increase of 40% over the FY22 level.
States have regulated capital spending amid concerns over tax revenues after the cessation of the Goods and Services Tax (GST) compensation on June 30. However, the Centre has released an advance instalment of tax devolution to state governments amounting to Rs 58,333 crore for August, as central tax collections were buoyant, to prevent the states from cutting their capital expenditures.
Despite the Centre adjusting a portion of states’ off-budget borrowings of FY22 in FY23, it has permitted all states to borrow over Rs 6.8 trillion in the first nine months of the current fiscal (including some carry-forward of borrowing space from the previous year).
The Centre has put the net borrowing ceiling (NBC) for all states at Rs 8.58 trillion (3.5% of GSDP) in FY23. However, the 19 states under review—-Maharashtra, Uttar Pradesh, Madhya Pradesh, Karnataka, Tamil Nadu, Andhra Pradesh, Gujarat, Odisha, Telangana, Kerala, Rajasthan, West Bengal, Punjab, Bihar, Chattisgarh, Haryana, Jharkhand, Uttarakhand, Himachal Pradesh –reported 28% decline in borrowing to Rs 2.32 trillion in H1FY23.
The combined tax revenues of these states, however, stood at Rs 11 trillion in April-September of FY23, a robust 32% increase on year despite a high base of last year. This reflected the buoyant state GST revenue collections as well as higher devolution released by the Centre.
The 19 states saw their revenue expenditure rise 16% on year in H1FY23 compared with 13% in the year-ago period. These states have budgeted their revenue spending, most of which are committed in nature such as salaries, pension and interest cost, to rise about 20% on year to Rs 36.2 trillion in FY23.
The Centre is also extending a Rs 1 trillion soft loan, 80% of which is unconditional 50-year interest-free loan, to states to keep up the capex momentum. As states draw down from this facility, their capex may start showing improvement from Q3FY23 onwards, analysts said. However, such capex could be double counted as this is part of Central capex and will also become part of states’ capex. State capex is seen to have a higher growth multiplier potential than central Budget/CPSE capex.
The Centre’s capex has reached Rs 3.43 trillion or 45.7% of the annual target in H1FY23 compared with Rs 2.3 trillion or 41.4% in the year-ago period.
Thirteen large states, all of which are also covered in the FE analysis, have a massive fiscal space of Rs 7.4 trillion for capital spending in FY23, 81% higher than their capex of Rs 4.1 trillion in FY22 and 29% higher than their FY23 budget estimate (BE) of Rs 5.8 trillion, rating agency Icra said in a new report recently.
However, given the slow start to capex in the initial months, these states could end up with capital expenditure 7% less than Rs 5.8 trillion budgeted for FY23, it said.