Checkout Budget Highlights 2023Much has been written on the role of state governments as a capex growth engine for India. In FY2023, their budgets seemed ambitious, and the Government of India (GoI) too sharply enhanced its support for state capex. While financing does not appear to be a constraint, state capex has been lacklustre so far this year and we are apprehensive of a considerable shortfall in the actual outgo relative to the amount that was budgeted for FY2023.
For starters, all the 28 state governments had together budgeted a sharp step up in their capital spending to Rs 7.5 trillion in FY2023 from Rs 6.3 trillion in the revised estimates for FY2022. This was augmented by the GoI through its “Special Assistance as Loan to States for Capital Expenditure” scheme (interest-free capex loans). A generous amount of Rs 1 trillion was initially budgeted by theGoI under this scheme, over and above the states’ normal borrowing limits.
Capex Spending Lags
However, state capex spending and their offtake under the GoI scheme were tepid through the first half of FY2023. Initially, concerns regarding the fiscal situation after the planned end to the GST compensation period of five years on June 30, 2022, may have restrained the states’ capital spending. Subsequently, the monsoon quarter seasonally sees subdued capital spending by the states.
Unaudited provisional fiscal data is available for the first nine months (April to December) of FY2023 for 23 states (excluding Bihar, Goa, Manipur, Meghalaya and Mizoram) from the Comptroller and Auditor General (CAG). An analysis of this data reveals that the combined capital spending of the 23 states stood at Rs 3.2 trillion. This was equivalent to only 46 percent of their FY2023 BE of Rs 7.0 trillion, the lowest since FY2020. As many as 10 of the 23 states in the sample had spent less than 50 percent of their budgeted capex by the end of the first nine months of the ongoing fiscal. Karnataka and Kerala were among the positive outliers, having spent around two-thirds of their budgeted capital outlay and net lending for FY2023 during the first nine months.
Moreover, even till January 2023, the utilisation under the interest-free capex loan scheme by the states was limited to Rs 0.4 trillion. Eventually, the GoI stepped down the allocation to Rs 760 billion for FY2023 from the initial Rs 1.0 trillion.
Robust Revenue Growth
The overall muted capital spending trends are a bit perplexing, considering that 12 of the 23 states recording a revenue surplus and Tamil Nadu and West Bengal reported a revenue deficit of less than 50 percent of their budgeted level in the first nine months of FY2023.
Specifically, the own-tax revenues of the states, which comprise nearly half of their total revenue receipts, expanded by an encouraging 24 percent to Rs 11.8 trillion during April-December FY2023 on the back of already high growth in the year-ago period. Additionally, the state governments will benefit from the upward revision in the tax devolution to Rs 8.3 trillion for FY2023 from the Rs 7.2 trillion that they had included in their FY2023 BE. Amidst wide variation in the revenue spending pattern of the states during the first nine months of FY2023, the aggregate revenue expenditure of the 23 states was ~63 percent of the FY2023 BE, which is also lower than the trends seen in recent years. Further, the fiscal deficit of the sample during April-December FY2023 was equivalent to only 40 percent of the BE, lower than the trends seen in previous years.
Moreover, the actual market borrowing by states in FY2023 has persistently trailed the indicated level, suggesting that execution, and not the availability of financing is the chief constraint.
The actual capex during April-December FY2023, implies that spending of Rs 3.8 trillion is required in Q4 FY2023 to meet the 23 states’ budgeted target of Rs 7.0 trillion for FY2023. This entails a huge YoY expansion of ~51 percent in Q4 FY2023, which seems unlikely, even though we remain hopeful of some year-end boost to spending.
We estimate the actual capex by the 23 states in Q4 FY2023 at Rs 2.7-3.0 trillion, implying that the spending for the year would be 10-15 percent lower than the budgeted amount.
For FY2024, the GoI has substantially enhanced the allocation for the interest-free capex loan to Rs 1.3 trillion. This should cushion the impact of the decline in the base borrowing limit of the states to 3.0 percent of gross state domestic product (GSDP) for FY2024 from 3.5 percent of GSDP in FY2023. State budgets for FY2024 are starting to trickle in. Many of them have stepped up capex further. Regardless, the actual execution by the state governments remains key to augmenting capex in FY2024, and making this engine pull its rightful weight.
Aditi Nayar is Chief Economist and Head- Research & Outreach, ICRA Limited. Views are personal, and do not represent the stand of this publication.