Spending cut: States applied brakes on capex even before Covid

By: |
June 16, 2020 12:01 AM

Capex of six states reviewed by FE fell 7.6% in FY20

These 14 states had witnessed a measly 1.9% growth in tax revenues in the April-February period last year, against 13% growth a year ago.

State governments applied brakes on their capital expenditure even before the spread of Covid-19 and the imposition of national lockdown, early data suggests. Among them, half a dozen states whose budgets were reviewed by FE (Karnataka, Andhra Pradesh, Kerala, Odisha, Chhattisgarh and Tripura), reported an aggregate 7.6% decline in capex in FY20, compared with 10.2% growth in FY19.

For a larger set of 14 states, capital expenditure had seen flat growth in the first 11 months of last fiscal (April-February), against a solid 20% growth in the year ago period. These 14 states had witnessed a measly 1.9% growth in tax revenues in the April-February period last year, against 13% growth a year ago.

Tax revenue growth of the six states reviewed by FE declined 3.5% in FY20, compared with 14% growth in FY19.

Clearly, after several years of steady growth in capex that even outpaced the Centre’s budgetary capex growth, the states cut down on this most productive variety of spending in FY20. Given that revenues are likely to be more subdued in the FY21, even the increased borrowings may not enable them to reverse the trend in the current fiscal year.

As for the fourteen states – Uttar Pradesh, West Bengal, Gujarat, Karantaka, Madhya Pradesh, Rajashtan, Kerala, Odisha, Punjab, Chattisgarh, Haryana, Jharkhand, Himachal Pradesh and Nagaland — only Rs 2 lakh crore or 58% of the FY20 capex target of Rs 3.6 lakh crore was achieved in the first 11 months of the year.

In contrast, the Centre’s capex grew 11.2% last fiscal, compared with 14.9% budgeted for the year. The Centre’s capex was Rs 3.36 lakh crore in FY20 compared with Rs 3.03 lakh crore in FY19, while states’ capital expenditure was pegged to increase 29% on year to Rs 5.81 lakh crore in FY20.

The trend of capex pace reduction by states is not likely to continue through FY21 but potentially intensify. This could weaken that one pillar of the economy — government expenditure – which has over the last two-three years given the much-needed support to the economy and is expected to play an even bigger role in the current fiscal, as most analysts expect growth to be in the negative territory.

Lowering of capex by states was actually a drag on the country’s GDP growth in the second half of FY20 itself. Public capex has been supporting the economy in a major way over the past few years in the absence of strong private support. In recent years, the ratio of public capex has been roughly in the 5.5:5:3.5 ratio among the states (budget), central PSUs and the Centre (budget).

Many, including rating agencies, project India’s GDP to shrink by 4-5% or more in FY21. The country’s GDP growth slowed to an 11-year low of 4.2% in FY20 and the Centre’s fiscal deficit in FY20 was revealed to be 4.6% of GDP, the highest level since FY13. With the state governments also seen to report their combined fiscal deficit for FY20 to be higher than 2.6% of the GDP – the figure might turn out to be 3% or thereabouts, the consolidated fiscal deficit of the Centre and states in FY20 could be around 7.6% (Centre’s actual plus 3% of states).

SBI economists have estimated the general government fiscal deficit to be 13.3% (8.3% for Centre and 5% for states) in FY21 due to likely substantial weakening of revenues.

The decline in tax revenue growth is evidently hitting the state capex. While all the six states for which FY20 data is available missed their capex targets in FY20, three even saw a decline in capex, including Andhra Pradesh and Odisha.

The precarious revenue position has forced states to borrow more for revenue expenditure. Borrowings by these six states were up 20% in FY20, compared with an annual increase of only 1% in the previous year.

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