States yet to restore capex pace

Acute revenue constraints has resulted in a big drop in the state government’s capital expenditure in the current fiscal; according to an FE review of the budgetary spending of fifteen major states, their capex was down 16% on year in April-January.

The significance of the drop will be more clear in the context that the FY21 capex target for all states as per their budgets (BEs) was Rs 6.5 lakh crore, up 30% on year. State capex is believed to have a greater multiplier effect to trigger economic growth.

Budgetary capex by these fifteen state governments dropped by nearly a quarter on year in April-December FY21.

Capex undertaken by states used to be 60% of general government capital expenditure in recent years; these expenditures are generally prone to adjustments, conditional upon revenue generation. In FY18 and FY19 as well, capital spending was reduced from budgeted levels, but not to the extent being seen in the current year.

Among them, these fifteen states – Uttar Pradesh, Tamil Nadu, Madhya Pradesh, Andhra Pradesh, Karnataka, Rajasthan, Odisha, Telangana, Kerala, Maharashtra, Punjab, Chhattisgarh, Haryana, Jharkhand and Uttarakhand – reported combined capital expenditure of Rs 1.79 lakh crore in April-January of FY21, compared with Rs 2.13 lakh crore in the year-ago period.

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 in the initial months of this fiscal, tax revenues of the 15 states declined by 14% on year during April-January.

Together, the states will be receiving about Rs 5.5 lakh crore in devolution for FY21 (revised estimate) against the budget estimate of Rs 7.8 lakh crore. The Rs 2.3-lakh-crore shortfall in tax transfers could further hurt capex in the remainder of this fiscal.

Compared to this, the Centre has managed to spend Rs 3.62 lakh crore as budget capex during April-January, up 35% on year; the FY21 target is Rs 4.38 lakh crore (up 30.8% on year).

Reacting to the Q3 GDP data, the finance ministry said recently that the 0.4% growth in the quarter afer two consecutive quarters of deep contraction reflected “further strengthening of V-shaped recovery” that began in Q2. The resurgence of the gross fixed capital formation was also triggered by strong capex by the Centre. The fiscal multipliers associated with Capex are at least 3-4 times larger than government final consumption expenditure, it said.

In recent months, the Centre has indeed stepped up spending to support the economy and also successfully roped in CPSEs in the venture, but the revenue-starved state governments have been forced to slow their capex.

The central government’s budget capex grew a steep 335% on year in January, up from 63% December and 249% in November; its overall budget spending grew 49% in January, versus 29% in December and 48% in November.

In fact, if the Centre were to meet the revised budgetary expenditure estimate (RE) for FY21, it would have to more than double the spend in Q4 from the year-ago level. A good part of this extra spending would propel growth, although large lumpy items like clearance of fertiliser subsidy arrears to industry and release of dues to FCI would have only minimal impact.

Borrowings by the fifteen states whose finances were reviewed by FE rose a 29% on year to about Rs 4.19 lakh crore in April-January of this fiscal, nearly the same rate of borrowing increase was witnessed in the year ago period. With tax devolution to come down significantly in the remaining months of this fiscal, the states are sure to further accelerate borrowings to make up partly for revenue shortfalls.

According to India Ratings, the states’ fiscal deficit may come at about 4.6% of GDP in FY21.