State government’s capital expenditure grew at a modest pace in the first eight months of the current financial year even though the Centre released two additional monthly instalments of tax devolution and released a substantial portion of capex loans to states.
The combined capex of eighteen states whose finances were reviewed by FE was up just 7.5% on year at Rs 2.41 trillion in April-November of the current fiscal. The annual growth was 70% in the year-ago period, which was of course aided by a favourable base.
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These states have budgeted a capex of Rs 6.3 trillion for FY23, an increase of close to 40% over the FY22 actuals.
Despite increased fiscal space, the state governments have shown no inclination to accelerate capex vis-a-vis budget targets, indicating their concerns about elevated debt levels post-Covid outbreak.
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, 60% has been utilised in April-November 2022. The capex acceleration in October-November was aided by the release of about Rs 35,000 crore to states in 50-year interest-free capex loans.
In April-November 2022, CPSES and departmental arms (with capex of Rs 100 crore or more) achieved 60% of their FY23 target of Rs 6.62 trillion.
To encourage states to undertake capex, the Centre has released two advance instalment of tax devolution to state governments amounting to Rs 1.17 trillion, as central tax collections were buoyant.
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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 28% decline in borrowing to Rs 2.42 trillion in April-November of FY23.
Rating agency Icra has forecast that magnitude of the release of Central transfers, capex loans, actual capex spending pose a downside risk state government loans issuance in Q4 FY23 as against the indicated amount of Rs 3.4 trillion.
The combined tax revenues of these states stood at Rs 14.47 trillion in April-November of FY23, a robust 28% 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 18 states saw their revenue expenditure rise 14.5% on year in April-November of FY23 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 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 has said that the combined spending of 18 states reviewed by it could be 23% lower than the FY23 budget estimate.