Capital spending by 13 state governments, which have availed interest-free loans from the central government, is expected to rise by approximately 29% year-on-year to reach ₹6.2 trillion in the fiscal year 2023-24 (FY24), according to a report by rating agency Icra Ltd. However, this projected capital expenditure (capex) falls short of the Budget Estimates (BE), which had anticipated a spending of ₹6.7 trillion.
The outlook for revenue is less optimistic, with revenue and fiscal deficits for these states expected to amount to ₹2.1 trillion and ₹8.3 trillion, overshooting the budgeted ₹1.4 trillion and ₹7.7 trillion, respectively, according to the rating agency.
Additionally, debt and guarantee leverage levels of these states are forecasted to increase to 30% of their Gross State Domestic Product (GSDP) in FY24, up from 28.9% in FY23.
The central government had initiated an interest-free capex loan scheme for states in response to the early challenges posed by the COVID-19 pandemic. For the current fiscal year, ₹400 billion of the allocated ₹800 billion for the ‘Special Assistance to States for Capital Investment’ has been disbursed. An additional ₹300 million is set for release upon the demonstration of state reforms or project proposals.
In FY24, 16 states have opted for the loan scheme, including Arunachal Pradesh, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Mizoram, Odisha, Rajasthan, Sikkim, Tamil Nadu, Telangana, and West Bengal.
Icra’s sample of 13 states included Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, and West Bengal.
These states collectively represent nearly 83% of the Indian GDP (at current prices) in FY22, according to the rating agency.
Aditi Nayar, Chief Economist and Head of Research & Outreach at Icra Ltd, highlighted that the anticipated year-on-year increase in capex is a result of the support provided by the Government of India (GoI) through the increase in the allocation for the Scheme for Special Assistance to States for Capital Investments. The allocation has been raised to ₹1.3 trillion in FY24 Budget Estimates, up from ₹0.8 trillion in loans disbursed in FY23.
The rating agency also anticipates a sharp decline in grants from the Centre to the states in FY24. This is primarily due to the discontinuation of the Goods and Services Tax (GST) compensation grants and a reduction in the Finance Commission-recommended grants. Total grants to the 13 states are estimated to reach ₹3.2 trillion in FY24, which is nearly two-thirds of the budgeted amount and the lowest since FY20.
The increase in capital spending and the challenges posed by revenue shortfalls and rising debt levels highlight the complex financial landscape that these states are navigating in the upcoming fiscal year.
