Growth in capital expenditure by state governments was flat in the first eleven months of the last financial year, a review of the data shows, indicating that the sluggishness witnessed in early parts of the year likely persisted till very late.

This was even as reasonable capex momentum was maintained by the Centre despite its fiscal constraints in 2022-23. The central public sector enterprises also pitched in.

The combined capex of 20 states, whose finances were reviewed by FE, was around Rs 3.5 trillion in April-February of FY23, nearly at the same level of the year ago period. Their capex growth was 37% during the corresponding period in FY22.

Of course, including the Rs 47,000 crore 50-year interest-free capex loans by the Centre – which are accounted for once the funds are disbursed by the Centre – capex by these states grew by about 13% on year in April-February of FY23. These states represent about 90% of the country’s GDP.

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In FY23, the Centre’s capex grew by 18% to around Rs 7 trillion (including capex loans to states), which was marginally short of Rs 7.28 trillion annual target. In April-February, CPSES and departmental arms (with capex of Rs 100 crore or more) grew by about 20% to Rs 5.64 trillion including budget support to railways and NHAI.

The curbing of capex by the states shows their concerns over reining in their Debt to GSDP ratio to a comfortable level amid revenue uncertainties. These 20 states reported a 16% growth in their tax revenues (own and Central devolution) in April-February, upon 39% growth recorded in the year-ago period.

The states had set a combined target (Budget Estimates) of a 38% rise in capex in FY23. The realisation that states are reducing their own capex after getting Central aid for asset creation has led the Union government to tighten rules for availing the grant-like capex support in FY24.

Accordingly, the release of Rs 33,300 crore or a third of the Rs 1 trillion untied capex loans to states are linked to their incremental capex in FY24.

While the Centre would provisionally release these funds after states achieve 45% of their annual capex target in H1FY24, the amount would be fully recovered from them in FY25 if they fail to meet the investment target by March 2024.

While the states compressed capex as well as borrowings, they used the revenue buoyancy so far in FY23 to meet double-digit expansion in revenues expenditure such as on pension and subsidies.

These states – Uttar Pradesh, Gujarat, Andhra Pradesh, Maharashtra, Madhya Pradesh, Karnataka, Tamil Nadu, Odisha, Telangana, Kerala, Rajasthan, West Bengal, Bihar, Punjab, Chhattisgarh, Haryana, Assam, Jharkhand, Uttarakhand and Himachal Pradesh — revenue spending rose 13% on year with pension outgo rising 14% on year and subsidies by 21%.

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The consolidated capital outlay of the states is budgeted to grow by 38.4% on year to Rs 8.19 trillion in FY23, but given the trend till February, this target will surely be missed by a wide margin even if they step up capex in March.

For example, Uttar Pradesh which has a massive capex target of Rs 1.36 trillion for FY23, has achieved Rs 0.61 trillion or 45% of the annual target in the first eleven months of the year.

With the fiscal deficit (2.8% in FY22) of the states rebounding to pre-pandemic level aided by buoyant revenue collections and prudent expenditure management, a Reserve Bank of India report recently said states should mainstream capital expenditure planning rather than treating them as “residuals and first stops” for cutbacks to meet budgetary targets.