Over the last three years, capital spending by states saw strong growth, averaging 27.6 per cent. But, how are things looking ahead? A study by the National Stock Exchange (NSE) based on analysis of budgets of 21 states, comprising 95 per cent of GDP, suggests it will considerably slow down in the current financial year ending March 2025.
According to the NSE study, capital spending by states is expected to grow by a "modest" 6.5 per cent to Rs 6.5 lakh crore in 2024-25, which is much slower than the 39.3 per cent growth as per revised estimates for the previous financial year.
The capital-to-revenue expenditure ratio, a measure of expenditure quality, is set to decline to 20.7 per cent for 2024-25, from 21.2 per cent as per revised estimates for 2023-24, the data showed. While Gujarat leads here with a ratio of 36.2 per cent, Punjab has the lowest ratio at 6.2 per cent.
Revenue expenditure is also budgeted to increase by a four-year low of 8.9 per cent to Rs 44.2 lakh crore.
While revenue receipts, comprising over 99 per cent of states’ overall receipts, are expected to grow at a marginally higher 10.6 per cent, non-debt capital receipts are budgeted to decline by 30 per cent, according to NSE.
"The growth in revenue receipts is expected to come from robust expansion in states’ own revenues, tax (+14.5 per cent) and non-tax (+17.9 per cent), together accounting for 59.4 per cent of total receipts for these states in FY25. On the contrary, the overall transfer from the Centre in the form of tax devolution and grants-in-aid are budgeted to increase by a modest 4.5 per cent," NSE said in the report.
The moderation in overall receipts has weighed on expenditure growth, with growth in both revenue and capital expenditure moderating to single digits in FY25 budgeted estimates.
"While revenue expenditure growth is pegged at 8.9 per cent (versus 17.2 per cent in FY24), committed expenditure growth is budgeted to remain fairly steady 10.2 per cent. Capital expenditure growth, on the other hand, is estimated at a marginally lower 6.5 per cent in FY25, but off a strong 39.3 per cent growth in the previous year. The states’ capital outlay—capital expenditure excluding loans and advances by state governments—is expected to grow at an even lower 4.7 per cent," according to NSE.
However, there is a significant disparity on spending among states. While, large states such as Gujarat, Rajasthan and Tamil Nadu have budgeted a capex growth between 24-30 per cent, other large states including Bihar, Madhya Pradesh and Maharashtra budgeted a contraction, according to the study.
Due to a slight miss in overall receipts, on the back of lower-than-budgeted non-tax revenues, along with higher-than-budgeted revenue expenditure, the overall deficit for the 21 states studied, surpassed the budget estimates by 30 bps to 3.5 per cent of GSDP (gross state domestic product) last financial year. For FY25, the fiscal deficit is estimated to be lower at 3.2 per cent of GSDP, but still exceeding the 3 per cent recommended by the 15th Finance Commission, NSE noted in the report.