State capex down nearly a quarter in the first half of the current fiscal

If in the last financial year, the states had to cut capital expenditure by a quarter from the original budget estimate (BE), the reduction in such spending appears to have been even sharper in the first half of the current fiscal.

According to an FE review of budgetary spending by 14 states, in April-September this year, their capex was down 22% on year; considering that the combined capex by all states was budgeted to increase by 31% on year in FY21, the slippage in state capex from the budget target is sure to have been unprecedentedly steep in the Covid-ravaged first half.

If public-sector fixed capital formation has held up in recent years even amid a worrisome, prolonged decline in private investments, the contribution of state governments have been vital; state capex is also seen to have a higher growth multiplier potential than Central Budget/CPSE capex.

While Centre’s Budget capex declined 12% on year, a conscious effort is being made by the government to ensure that the CPSEs ramp up investments.

The curbing of capex by the states is primarily due to the acute revenue constraints they are facing. While the low revenue buoyancy was evident in the last year itself, the situation has aggravated due to the pandemic. Even after liberal transfers by the Centre from the divisible tax pool, tax revenues of the 14 states declined by more than a quarter during April-September.

Their total expenditure, however, was almost at the same level as in the year-ago period, thanks to the rise in spending on welfare and relief measures. Even for the Centre, the overall budget spending in the first half was flat on year.

Among them, the 14 states – Tamil Nadu, Madhya Pradesh, Andhra Pradesh, Karnataka, Rajasthan, Odisha, Telangana, Kerala, Chhattisgarh, Haryana, Jharkhand, Uttarakhand, Himachal Pradesh and Tripura — reported a combined capital expenditure of Rs 67,579 crore in April-September of FY21, down 22% on year.

The combined capex by all states is projected to rise by an ambitious 31% on year to Rs 5.98 lakh crore in FY21 over FY20 actuals. The states had slashed their capex to Rs 4.97 lakh crore in FY20 from BE of Rs 6.22 lakh crore, as per the recent RBI report on state finances. “Capital expenditure undertaken by states, which accounts for more than 60% of general government capital expenditure is generally treated as a residual and is prone to adjustment, conditional upon revenue generation. In 2017-18 and 2018-19 as well, capital spending was reduced from budgeted levels,” RBI said in the report.

Borrowings by the 14 states whose finances were reviewed by FE rose a whopping 63% to Rs 2.28 lakh crore in April-September of this fiscal compared with 6% increase in the year ago period. What is more worrisome for the states is that the Centre, which has largely maintained tax devolution at nearly the FY21 budgeted pace so far, will likely cut down the transfers in the fourth quarter of FY21 in view of the decline in its gross tax receipts.

According to Icra, the shareable tax pool may turn out to be Rs 13.4 lakh crore in FY21, 30% lower than the budgeted amount of Rs 19.1 lakh crore. The agency has projected the central tax devolution to the state governments at about Rs 5 lakh crore (after adjusting for Centre’s extra transfers of Rs 48,400 crore in FY20) in FY21, a substantial Rs 2.8 lakh crore lower than the Rs 7.8 lakh crore budgeted.

As per state budgets, their combined fiscal deficit stood at 2.6% of GDP in FY20 and 2.4% in FY19. FY21 will, however, likely see a record spike in the fiscal deficits of both the Centre and states.