Budgetary capital expenditure by state governments might have dropped by nearly a quarter on year in April-December FY21 and it could fall further in January-March due to revenue constraints, according to a review of the data from fifteen large states by FE.
This contrasts with a 31% year-on-year increase in the Centre capital expenditure in the current year to Rs 4.39 lakh crore (revised estimate) and large central public sector undertakings (CPSEs) achieving 67% of their capex target in April-January by spending Rs 3.35 lakh crore.
Among them, the fifteen states – Uttar Pradesh, Tamil Nadu, Madhya Pradesh, Andhra Pradesh, Karnataka, Rajasthan, Odisha, Telangana, Kerala, West Bengal, Gujarat, Punjab, Chhattisgarh, Haryana and Jharkhand – reported combined capital expenditure of Rs 1.53 lakh crore in April-December of FY21, compared with Rs 1.95 lakh crore in the year-ago period, down 22%. The FY21 capex target for all states as per the state budgets was Rs 6.5 lakh crore, 30% more than the achieved spending in FY20.
The curbing of capex by the states is primarily due to the acute revenue constraints they are facing (see chart). 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 15% on year during April-December.
All states together will be receiving just about Rs 5.5 lakh crore in tax devolution for FY21 (revised estimate) against the Budget estimate (BE) of Rs 7.8 lakh crore. The Rs 2.3-lakh-crore shortfall in tax transfers could lead to a further decline in states’ capex in Q4FY21.
There might, however, be a pick-up in FY22. “The share of capex in the (states’) total expenditure is likely to be higher at 15.5% in FY22 (2.9% of GDP) as against 10.5% in FY21 (2.1% of GDP). The burden of fiscal adjustment brought on by the pandemic was met by states through a sharp reduction in capex during FY21,” India Ratings wrote recently.
Capex undertaken by states, which usually accounts for more than 60% of general government capital expenditure, is 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 this year.
Compared to this, the Centre has managed to spend Rs 3.1 lakh crore as budget capex during April-December, up 20.9% on year. Reversing a decline seen in the first six months of this fiscal, a conscious effort is being made by the Centre to accelerate capital expenditure in H2FY21. The Centre’s capex in November at Rs 67,816 crore was up 63% on year. Also, the Centre’s capex target for the next fiscal year is set at an impressive Rs 5.54 lakh crore, up 26% from the revised estimate for the current year
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 has been vital; state capex is also seen to have a higher growth multiplier potential than central Budget/CPSE capex.
The Centre, states and central PSEs among them will likely spend Rs 7.5 lakh crore on capital investments in the second half of this fiscal year, up 80% over such expenditure in the first half, according to an FE analysis, based on official projections and information gathered from different sources.
Borrowings by the fifteen states whose finances were reviewed by FE rose a whopping 39% on year to about Rs 4.1 lakh crore in April-December of this fiscal compared with a 16% increase 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 the revenue shortfalls.
As per all state budgets, their combined fiscal deficit stood at 2.6% of GDP in FY20 and 2.4% in FY19. According to India Ratings, the states’ fiscal deficit may come in at about 4.6% of GDP in FY21.