Despite robust growth in tax revenues and release of capex loans by the Centre, state government’s capital expenditure by state governments saw flat growth in the first seven months of the current financial year.
The combined capex of eighteen states whose finances were reviewed by FE was up just 1% on year at Rs 1.96 trillion in April-October of the current fiscal. The annual growth was 81% in the year-ago period albiet on a favourable base.
These states have budgeted a capex of Rs 6.32 trillion for FY23, an increase of 39% over the FY22 actuals.
The state governments have slowed down their capital expenditure vis-a-vis budget targets is indicative of their concerns about elevated debt levels, which prompted them to curb borrowings.
The gross fixed capital formation (investment) to GDP ratio increased to 34.6% in Q2 FY23 from 33.4% in Q2 FY22 owing to a strong capital expenditure push by the government, especially the Centre and bodies like NHAI and the railways.
The Centre has budgeted a capex of Rs 7.5 trillion including Rs 1 trillion support to states for FY23, up 27% from the actual spending of Rs 5.93 trillion in FY22. Of this, 54.6% has been utilised in April-October 2022. The capex acceleration in October was aided by the release of Rs 26,000 crore to states in 50-year interest-free capex loans.
CPSES and departmental arms (with capex of Rs 100 crore or more) have achieved 53% of their FY23 target of Rs 6.62 trillion.
States’ capex is seen to have a higher growth multiplier potential than central Budget/CPSE capex.
To encourage states to undertake capex, 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.
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, Gujarat, Odisha, Telangana, Kerala, Rajasthan, West Bengal, Punjab, Bihar, Chattisgarh, Haryana, Jharkhand, Uttarakhand, Himachal Pradesh –reported 48% decline in borrowing to Rs 2.44 trillion in April-October of FY23.
The combined tax revenues of these states, however, stood at Rs 12.3 trillion in April-October of FY23, a robust 31% 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 14% on year in April-October of FY23 compared with 13.5% 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 34 trillion in FY23.
Taking into account the trend of lower-than-budgeted capital outlay as well as back-ended spending in recent years, rating agency Icra last week said the combined spending of 18 states reviewed by it could be 23% lower than the FY23 budget estimate.