Capital expenditure by state governments will likely shrink in FY21, bucking the trend of robust growth in fixed asset creation reported by most of them in recent years.
Capital expenditure by state governments will likely shrink in FY21, bucking the trend of robust growth in fixed asset creation reported by most of them in recent years. According to an FE review of budgetary spending by 16 major states, their capex was down 16% on year in April-February, compared with a negative growth of 5% in FY20.
According to RBI’s customary study of state finances, the total capex roll-out by all states stood at Rs 4.97 lakh crore in FY20, down 20% from the budget estimate of Rs 6.22 lakh crore the previous year, but it was still up 2% on year.
The 16 states reviewed by FE reported combined capital expenditure of Rs 2.16 lakh crore in April-February of FY21, compared with Rs 2.56 lakh crore in the year-ago period. This means that against their combined annual capex target of Rs 4.7 lakh crore for the year, these states achieved only a dismal 46% in the first 11 months of FY21.
Clearly, acute revenue constraints and Covid-related welfare spend have forced these states to cut the capex. The 16 states reviewed are Uttar Pradesh, West Bengal, Madhya Pradesh, Gujarat, Andhra Pradesh, Karnataka, Rajasthan, Odisha, Telangana, Kerala, Maharashtra, Punjab, Chhattisgarh, Haryana, Jharkhand and Uttarakhand.
The effect of the sharp drop in state capex on the economy will be more evident in the context that FY21 capex target for all states as per their Budget Estimates (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.
Capex undertaken by states used to be around 60% of general government capital expenditure in recent years; these expenditures are generally prone to adjustments, conditional upon revenue generation. In FY18, FY19 and FY20 as well, capital spending was reduced from the budgeted levels, but not to the extent being seen in the current year.
The curbing of capex by the states is primarily due to the acute revenue constraints they are facing. While the low revenue buoyancy was evident in the last year itself, the situation has aggravated due to the pandemic.
Even after liberal transfers by the Centre from the divisible tax pool in the initial months of FY21, tax revenues of the 16 states declined by 13% on year during April-February. Tax revenues could see some improvement in March as the Centre has devolved Rs 45,000 crore extra over the revised estimate (RE) for FY21.
States will be receiving about Rs 5.95 lakh crore in devolution for FY21 against the budget estimate of Rs 7.8 lakh crore. The Rs 1.85-lakh-crore shortfall in tax transfers have indeed contributed to the lower capex by states.
Compared with this, the Centre has managed to spend Rs 4.1 lakh crore as budget capex during April-February, up 33% on year; the FY21 target is Rs 4.38 lakh crore (up 30.8% on year).
Reacting to the Q3FY21 GDP data, the finance ministry said recently that the 0.4% growth in the quarter after two consecutive quarters of deep contraction reflected “further strengthening of V-shaped recovery” that began in Q2. The resurgence of the gross fixed capital formation was also triggered by strong capex by the Centre. The fiscal multipliers associated with capex are at least 3-4 times larger than government final consumption expenditure, it said.
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 have been forced to slow their capex.
Borrowings by the 16 states whose finances were reviewed by FE rose a 48% on year to about Rs 5.1 lakh crore in April-February of FY21 compared with 14% increase witnessed in the year-ago period.
According to India Ratings, the states’ fiscal deficit may come at about 4.6% of GDP in FY21.