MUMBAI: Major states are on course to nearly halve their capex growth plans to only 12.6 percent -- down from the planned 24 percent -- which on a combined level will be Rs 6.5 trillion, down from the budget estimates of Rs 7.2 trillion.
According to an analysis by Icra Ratings Wednesday, this massive cut to the tune of Rs 70,000 crore is primarily due to the dull start to the capex cycle in the initial months of this fiscal as well as the anticipated undershooting in their revenue.
The assessment is based on the budget numbers of 13 states -- Andhra, Gujarat, Haryana, Karnataka, Kerala, MP, Maharashtra, Punjab, Rajasthan, TN, Telangana, UP, and Bengal -- which accounted for 82 percent of national GDP in FY2023.
The agency foresees a modest slippage in the combined revenue and fiscal deficits of these states in FY25 to the tune of Rs 2.2 trillion and Rs 8.8 trillion, respectively, from Rs 1.9 trillion and Rs 8.5 trillion, respectively, in the budget estimates.
Moreover, the combined leverage (debt+ guarantees) level of these states is on course to rise to 30 percent of GSDP this fiscal from 29.2 percent in FY24.
“With a 13.5 percent contraction in capex during the first four months of FY25 and heavy rainfalls in some of states in Q2, capex by the sample states appears set for a back-ended surge in H2. We forecast a 12.6 percent expansion in the combined capex of the sample states this fiscal, significantly lower than the 24 percent budgeted earlier for FY25. In FY24 the capex clipped at 19.6 percent," said Aditi Nayar, the chief economist at the agency.
She said Gujarat, Karnataka, Maharashtra and TN have adequate fiscal space for meeting their budgeted capex and anticipates some undershooting by the remaining sample states.
Although the Centre has enhanced the allocation for the scheme for special assistance to states for capital investments to Rs 1.5 trillion in July 2024 from Rs 1.1 trillion in February 2024, its utilisation to the full extent appears somewhat unlikely, following its sluggish offtake in the early months, she said.
The agency sees states' own tax revenue, the key driver of their revenue, to grow by a healthy 11.5 percent this fiscal trailing the optimistic 19.4 percent expansion anticipated in the budget.
After some tepidness in discretionary spending in Q1, there is a chance of a revival of rural demand in H2 aided by a healthy kharif harvest. However, a sharp turnaround in the grants from the Centre, budgeted by several states following a double-digit contraction in this revenue stream in the provisional actuals for FY24 looks unlikely, Nayar added.
She estimates the state GST, excise duty and S&R collections to expand by 11-13 percent. However, sales tax collection is projected to grow by a modest 5.5 percent, after a modest performance in FY24. Additionally, she expects the tax devolution to be in line with the amount indicated in the July Union Budget.
Notably, in absolute terms, the decline in grants recommended by the Finance Commission and other grants will offset the increase expected in grants related to various schemes of the Centre. Overall, the agency projects a mild dip in combined grants of 13 states over last fiscal.
Total revenue of these states is set to rise by 10 percent, much lower than the optimistic 18 percent indicated in budgets.
“We expect states’ revenue spending to rise by 12 percent, lower than the 18.4 percent budgeted. Accordingly, we estimate the combined revenue deficit of these states at Rs 2.2 trillion, higher than Rs 1.9 trillion in the budget estimates and Rs 1.5 trillion in FY24,” Nayar said.
She also foresees a modest slippage in the combined fiscal deficit to Rs 8.8 trillion from the Rs 8.5 trillion budgeted, taking their debt outstanding to Rs 70.4 trillion by March 2025, which is 25.6 percent of their GSDP.