After trailing by huge margins most of the year, states’ capital expenditure has improved in April- February but still may witness flat growth in FY25.
FE reviewed the finances of 16 states and found that their capex in April- February of FY25 declined by nearly 1% to Rs 4.51 lakh crore compared with Rs 4.55 lakh crore in the year-ago period.
The states reviewed were Maharashtra, Uttar Pradesh, Gujarat, Odisha, Madhya Pradesh, Andhra Pradesh, Karnataka, Tamil Nadu, West Bengal, Haryana, Kerala, Punjab, Rajasthan, Uttarakhand, Chhattisgarh and Assam.
Showing urgency for the execution of projects across the country to support economic activity, the Centre has relaxed a clutch of norms for its liberal interest-free capex loans to states to ensure that Rs 1.25 lakh crore earmarked in the revised estimate for the purpose are fully utilised and help arrest the decline in public capex. Till February 24, the Centre released Rs 1.15 lakh crore to states.
The Centre also frontloaded tax devolution to them by releasing three extra instalments amounting to about Rs 2.5 lakh crore since June instead of backloading them to accelerate their spending. Yet, the continued deceleration in capex showed that the states could not fully overcome the capacity constraints due to the backloading of project implementation owing to the general election and extended rains.
Due to improvement spending in February, the 16 states’ borrowings and other liabilities grew by 24.8% on year in April-February FY25 to Rs 5.83 lakh crore compared with a 26.7% increase in borrowing and liabilities in the year ago period.
These states under review reported a healthy 11.2% growth in their tax revenues in the April- February FY25 at Rs 25.2 lakh crore compared with the 15.9% growth recorded in the year-ago period.
The states under review reported about 11% annual increase in revenue expenditure in the first eleven months of FY25 compared with the 9% growth seen in the year-ago period.
The Centre is following a public capex –union, states and public enterprises—led economic growth revival. Yet, the public capex slowed down in FY25 due to factors including general elections.
In April-February of FY25, the Centre’s capex rose by a meagre 0.8%.
State governments contained their consolidated gross fiscal deficit (GFD) within 3% of gross domestic product (GDP) and their revenue deficit at 0.2% of GDP during 2022-23 and 2023-24. In 2024-25, states have budgeted a GFD of 3.2% of GDP, according to the RBI’s ‘State Finances: A Study of Budgets of 2024-25’.