States’ capital expenditure has contracted on year in the first nine months of the current financial year, diverging from the trend of sustained capex push by the Centre and central public sector undertakings.
The combined capex of 18 states, representing about 80% of the GDP, whose finances were reviewed by FE, contracted by around 6% in the first nine months of FY23 to `2.32 trillion, compared with over 50% growth in the year-ago period.
Including the `30,000 crore 50-year interest-free capex loans by the Centre – which are accounted for once the funds are disbursed by the Centre, the capex by these states grew by 3.7% on year in April-December 2022 period.
The regulation of capex by the Centre shows their concerns over revenue sustainability after the end of the GST compensation period in June this year. Notably, these 18 states reported a robust 27% growth in their tax revenues in the April-December period, upon 29% growth recorded in the year ago period.
The states had set a combined target (Budget Estimates) of 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 `33,300 crore or a third of the `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.
Empirical evidence points to higher multipliers of state capex relative to that of the Centre. This is one of the reasons for the Centre to route part of its capex through the states after the pandemic.
While the states compressed capex as well as borrowings, the states used the revenue buoyancy so far in FY23 to meet double-digit expansion in revenues expenditure such as on pension and subsidies.
These states–Andhra Pradesh, Maharashtra, Uttar Pradesh, Madhya Pradesh, Karnataka, Tamil Nadu, Odisha, Telangana, Kerala, Rajasthan, West Bengal, Punjab, Chattisgarh, Haryana, Assam, Jharkhand, Uttarakhand, Himachal Pradesh—revenue spending rose 12.4% on year with pension outgo rising 14.4% and subsidies by 17.3%.
The consolidated capital outlay of the states is budgeted to grow by 38.4% on year to `8.19 trillion in FY23, but given the trend till December, this target will surely be missed by a wide margin even if they step up capex in Q4FY23.
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.
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 revised its capex target to `7.28 trillion including `76,000 crore in support to states for FY23, up 23% from the actual spending of `5.93 trillion in FY22. Of this, 67% has been utilised in April-December 2022.
In April-December 2022, CPSES and departmental arms (with capex of `100 crore or more) achieved 68% of their FY23 target of `6.62 trillion including budget support to railways and NHAI.
The combined tax revenues of these states stood at `15.8 trillion in April-December of FY23, a robust 27% 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.
These states reported 27% on-year decline in borrowing to `3.25 trillion in April-December 2022.