Given the bleak tax revenues of states, their capital expenditure (capex) seems to have taken a severe knock in FY22. Despite pitched calls for higher capex to spur economic growth, the top 10 states, that account for about 77% of the total states’ capex, saw a significant 22% decline in FY22 over FY21, shows a TNIE analysis.
According to the RBI Handbook of Statistics on Indian States released last week, the top 10 states’ combined capex (Budget Estimate) stood at Rs 5.7 lakh crore in FY21. However, data compiled by Care Ratings (sourced from CAG), FY22 capex of these states fell to Rs 4.45 lakh crore, translating to a decline of Rs 1.26 lakh crore.
The states include Uttar Pradesh, Maharashtra, Madhya Pradesh, Rajasthan, Andhra Pradesh, Tamil Nadu, Gujarat, Karnataka, Telangana, and Bihar. Barring UP, the remaining nine states have budgeted lower capex in FY22 over FY21.
The states’ combined capex is often higher than that of the Centre and augments the overall public investment. Moreover, states have a bigger responsibility for capital formation being higher than 15% compared to the Centre and according to Care, any shortfall in spending will militate against capital formation as the capex of states is rooted to the ground level and is considered to have a higher multiplier effect on the economy relative to the Centre. And for momentum to be maintained in investment, these states need to keep the projects ticking.
But the top seem to be spending lesser and lesser. In the first six months of the current fiscal, they had spent just about 28.3% of the budgeted amount, far lower than the Centre’s over 40%. While Telangana, Madhya Pradesh, Rajasthan had spent a relatively higher proportion of the Budget estimate, Gujarat and Karnataka spent about 1/3 of the amount. The two laggards include Maharashtra and Uttar Pradesh, which incidentally are also the largest states in terms of size of capex.
Sensing the need to revive state-level capex, the Ministry of Finance recently took a call to frontload Rs 95,082 crore in two tranches of Rs 47,541 crore each to enable higher capex. Of this, the top 10 states are being given Rs 62,000 crore within this month. The top two states, i.e, UP and Maharashtra together will get about Rs 23,000 crore.
Typically, states increase their capex in the last quarter of the fiscal, when there’s greater clarity on the revenue flow and fiscal deficit. According to Care, the relatively low proportion of states’ expenditure incurred on capital projects has certain implications. “First, if states have accomplished only a quarter of the overall targets, there would be pressure in the second half to deliver on capex to really push the econmoy. The future flow of revenue will be critical that will drive capex by states as they tend to calibrate their expenses with revenue flows to ensure that the fiscal limits are not breached by the end of the year. Their state of fiscal deficit is also important as all such expenditure is discretionary and be deferred,” it noted.
Meanwhile, the Centre had targeted Rs 5.13 lakh crore of capex in FY22, excluding Rs 40,374 crore for loans. Of this, it has spent Rs 2.09 lakh crore during the first six months of the fiscal, which is about 41% of the Budget target. While the proportion spent is comparable to that of FY21 at 40%, it’s lower than 56% and 54% spent in FY20 and FY19 respectively.
