Thirteen large states 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.
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.
These states incurred combined capex of Rs 91,500 crore in April-July 2022 – which was just 16% of the FY23 BE.
Icra’s fiscal space assessment is based on the funds that are likely to be available from the unconditional market borrowings of 3.5% of gross state domestic product (GSDP) allowed by the Centre, the interest-free capex loan being given by the Centre, and the additional power sector reform-related borrowings (0.5% of GSDP). Of course, the estimate is after factoring in the revenue deficits estimated by Icra and the likely adjustment of off-budget borrowings of FY22.
“While the availability of funds doesn’t appear to be a constraint in FY23, the actual outgo incurred by these state governments in the early months of this fiscal has been rather muted. The state governments’ ability to ramp up execution, relative to the Rs 4.1 trillion that was incurred in FY22, will crucially affect whether the actual outcome turns out to be meaningfully higher than the budgeted Rs 5.8 trillion,” Icra chief economist Aditi Nayar said.
Icra’s analysis covers 13 states, namely, Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal. The combined GSDP (at current prices) of these states is nearly 85% of India’s GDP (at current prices) in FY21.
The Centre has budgeted for a capex of Rs 7.5 trillion in FY23, which includes 50-year tenure Rs 1 trillion interest-free loans to the state governments for capital spending. However, the Centre would be adjusting the incremental off-budget borrowings raised by the state governments in FY22, from their net borrowing ceiling (NBC), during FY23-FY26.
Icra estimated that the combined revenue deficit of these 13 states at Rs 2.1 trillion, higher than Rs 1.8 trillion each in FY23 BE and in FY22. While tax devolution as well as the goods and services tax (GST) compensation grants are likely to exceed the amount budgeted by the states in the sample in FY23, this will not fully offset the estimated shortfall in other revenues and the projected higher-than-budgeted revenue expenditure in the current fiscal.
“We assess that Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu, Uttar Pradesh, and West Bengal (Sub-set A) will have adequate resources to fully fund or exceed their budgeted capex for FY23. However, the fiscal space available for Haryana, Rajasthan, Kerala, Punjab, and Telangana (Sub-set B) appears to trail the capex budgeted for FY23, by a varying extent, suggesting that additional revenue mobilisation and/or expenditure efficiency measures may need to be found to boost capex,” Nayar added.
Based on the projected capex of Rs 5.4 trillion, the rating agency estimates the sample’s aggregate fiscal deficit for the current fiscal at Rs 7.5 trillion, higher than the Rs 7.3 trillion in FY23BE and Rs 5.9 trillion in FY2022 PA. The combined leverage (debt+ guarantees) level of the sample is expected to improve mildly to 28.8% of GSDP in FY23 from 29.2% of GSDP in FY22, with continuing variation across the states.