States’ capital expenditure remained subdued in the first ten months of the current financial year even as the Centre and the central public sector undertakings maintained their momentum.

The combined capex of 20 states, whose finances were reviewed by FE, contracted by around 4% in the first ten months of FY23 to around Rs 3 trillion, compared with over 41% growth in the year-ago period. These states represent about 90% of the country’s GDP.

Including the Rs 40,000 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 8.7% on year in April-January of FY23.

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The regulation of capex by the states shows their concerns over revenue sustainability after the end of the GST compensation period in June this year. Notably, these 20 states reported a robust 22% growth in their tax revenues in the April-January period, upon 31% 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 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, Chattisgarh, Haryana, Assam, Jharkhand, Uttarakhand, Himachal Pradesh—revenue spending rose 12% on year with pension outgo rising 14% and subsidies by 19%.

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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 January, this target will surely be missed by a wide margin even if they step up capex in February-March.

For example, Uttar Pradesh which has a massive capex target of Rs 1.36 trillion for FY23, has achieved Rs 0.54 trillion or 40% of the annual target in the first ten 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.

In April-January of FY23, the Centre achieved Rs 5.7 trillion (including capex support to states) or 78% of its annual target of Rs 7.28 trillion.

In April-December 2022, CPSES and departmental arms (with capex of Rs 100 crore or more) achieved 68% of their FY23 target of Rs 6.62 trillion including budget support to railways and NHAI.