End of GST aid makes states wary: States’ capex growth much slower than budgeted
Despite robust tax revenues and high borrowing limits, the state governments have reduced their borrowings, necessitating capital expenditure growth much lower than budgeted by them, in the first five months of the current fiscal year.
The combined capex of nineteen states whose finances were reviewed by FE, were up just 10% on year at Rs 1.33 trillion in April-August of FY23 compared with a 70% y-o-y increase in the corresponding period a year ago, albiet aided by a favourable base. These states have budgeted a capex of Rs 6.58 trillion for FY23, an increase of 40% over FY22 level.
The states have regulated capital spending amid concerns that over tax revenues after the cessation of the Goods and Services Tax (GST) compensation on June 30. However, the Centre has released an advance installment of tax devolution to state governments amounting to Rs 58,333 crore for August, as central tax collections were buoyant, to prevent the states from cutting their capital expenditures.
The Centre may release another advance installment of tax devolution to front-load the devolution. Rating agency Icra has estimated the Centre’s tax devolution to be higher than the budget target of Rs 8.17 trillion by Rs 1.13 trillion for FY23.
Despite the Centre adjusting a portion of states’ off-budget borrowings of FY22 in FY23, it has permitted all states to borrow over Rs 6.8 trillion in the first nine months of the current fiscal (including some carry forward of borrowing space from the previous year). The Centre has a fixed net borrowing ceiling (NBC) of Rs 8.58 trillion (3.5% of GSDP) for all states in FY23.
However, the 19 states under review—-Maharashtra, Uttar Pradesh, Madhya Pradesh, Karnataka, Tamil Nadu, Andhra Pradesh, Gujarat, Odisha, Telangana, Kerala, Rajasthan, West Bengal, Punjab, Bihar, Chattisgarh, Haryana, Jharkhand, Uttarakhand, Himachal Pradesh –reported 36% decline in borrowing to Rs 1.62 trillion in April-August 2022.
The combined tax revenues of these states, however, stood at Rs 9.14 trillion in April-August of FY23, a robust 34% increase on year despite a high base of last year. This reflected the buoyant state GST revenue collections as well as higher devolution released by the Centre.
The Centre is also extending a Rs 1 trillion soft loan, 80% of which is unconditional 50-year interest-free loan, to states to keep up the capex momentum. As states draw down from this facility, their capex may start showing improvement from Q3FY23 onwards, analysts said. State capex is seen to have a higher growth multiplier potential than central Budget/CPSE capex.
While the Centre’s capex growth year-on-year remained high at 47% as against a required rate of 27%, capital spending has averaged around Rs 50,000 crore per month in the first five months, lower than the required monthly average of Rs 62,500 crore to meet the FY23 BE of Rs 7.5 trillion.
The 19 states saw their revenue expenditure rise 16% on year in April-August of FY23 compared with 10% in the year-ago period.
