State governments are set to increase capital outlay by a modest 4 to 6% in FY26, pushing total spending to ` 7.4–7.5 lakh crore, according to a Crisil Ratings analysis of 18 major states that account for 94% of the country’s state-level capex.
This is a sharp deceleration from around 7% growth last year and well below the decadal average of nearly 11%.
Deteriorating Revenues and Rising Welfare Commitments
The slowdown stems from deteriorating revenues. Revenue receipts are growing sluggishly because of muted GST collections after rate rationalisation, lower tax devolution from the Centre, and softer nominal GDP growth as inflation eases.
Meanwhile, revenue expenditure is projected to jump 7 to 9%, propelled by committed liabilities (interest, pensions, salaries) and expanded welfare schemes, especially direct benefit transfers.
“Higher increase in revenue expenditure will widen revenue deficit by 45-50% to`3.0-3.1 lakh crore this fiscal,” said Anuj Sethi, Senior Director, Crisil Ratings.
This will lower fiscal space and borrowing capacity for carrying out capital outlays, Sethi said.
“With centre’s 50-year interest free capex loans to states remaining at similar level of `1.5 lakh crore, we expect growth in capital outlay to moderate to 4-6% this fiscal,” Sethi added.
Lower Fiscal Space and Shifting Sectoral Priorities
Consequently, capital expenditure as a percentage of GSDP is expected to dip to 2.2% from 2.3–2.4% in the past two years. Sector priorities remain water supply, sanitation, housing, urban development, and irrigation, while spending on transport — historically the largest segment — may moderate.
Public capital expenditure has a high multiplier effect and is critical for sustaining investment momentum amid private-sector caution. States now face the difficult task of balancing rising welfare commitments with the need for long-term asset creation, Crisil said.
Any sharper-than-expected GDP slowdown would exacerbate pressures, whereas stronger tax buoyancy or additional central grants could provide marginal relief. For now, the era of aggressive state-level capex expansion appears paused, it added.
