Sates’ capex up more than a third, revenues strong

Expenditure by state governments on asset creation may have risen more than a third on year in the first ten months of the current financial year, compared with a 7% rise in the year-ago period.

A review of the finances of 18 large states by FE showed that their capex in April-January this fiscal was up a solid 37% on year.

This augurs well for overall public capex and the economy as a whole. It shows states have only only quickly reversed the slump in capital expenditure witnessed in FY21, but also have consolidated the trend.

The development also bears out the notion that the withdrawal of GST compensation hasn’t dented the states’ revenues or spending power much. Release of interest-free loans and quick tax transfers by the Centre also helped.

While tax revenues of states remained reasonably strong, many of them also have raised the borrowing levels to augment capex.

The 18 major states – Uttar Pradesh, Tamil Nadu, Madhya Pradesh, Bihar, West Bengal, Andhra Pradesh, Haryana, Karnataka, Kerala, Maharashtra, Odisha, Punjab, Rajasthan, Assam, Uttarakhand, Telangana, Chattisgarh and Jharkhand- reported capital investment worth Rs 4.3 trillion n April-January 2024 against Rs 3.1 trillion in the year-ago period. In April-January this year, the Centre provided around Rs 65,745 crore in long-term loans to these states for asset creation.

During April-January, Uttar Pradesh (UP) was the biggest investor with Rs 78,180 crore compared with Rs 54,608 crore in the year-ago period. UP was followed by Madya Pradesh with Rs 41,867 crore (Rs 29,888 crore in the year-ago period) and Maharashtra with Rs 36,047 crore (Rs 28,106 crore.

Besides Central government’s capex support, overall buoyancy in revenues has supported consolidation and sustained a large increase in capital spending after the Covid 19 period. Capex by all states in aggregate were Rs 6.82 trillion in FY23 compared with 5.75 trillion in FY22, Rs 4.57 trillion in FY21 and Rs 4.6 trillion in FY20.

The 18 states under review reported a 13% growth in their tax revenues in April-January 2024 at Rs 20.7 trillion, upon the 22% growth recorded in the corresponding period of the previous year. The borrowings of these states rose 39% on year to Rs 6 trillion in April-January of FY24 as against a 12% decline in the year-ago period.

Even as capex surged, the states’ revenue spending was contained with about a 6% annual increase in April-January of FY24 compared with 12% in the year-ago period.

Till March 14, the Centre’s 50-year interest-free loans to states stood at Rs 1.09 trillion or 104% of the FY24 revised estimate thanks to last last-minute rush by some states to benefit from the scheme. To strengthen the hands of the states, the scheme for providing financial assistance to the states for capital expenditure was introduced in FY21.

Real GDP growth in Q3FY24 was a surprising 8.4% on year, which was largely driven by higher gross fixed capital formation at 10.6% on year due to the Centre, states and CPSEs’ thrust on capex.