Increasing allocation by state governments for capital expenditure will boost growth
- The Indian state governments have shifted towards fiscal consolidation after facing deficits due to the Covid-19 pandemic.
- The aggregate fiscal deficit of state governments in 2021-22 and 2022-23 was below 3% of GDP despite increased borrowing space provided by the Union government.
Shift in Spending Priority (2023-24)
- States, which collectively spend more than the central government, have historically focused on revenue expenditure.
- In 2023-24, there is a shift towards allocating more funds for capital expenditure, marking a departure from recent trends.
- States' capital outlay increased by 45.7%, and revenue expenditure grew by 9.3% during April-November 2023.
- The quality of expenditure, measured by the ratio of capital outlay to total expenditure, is at an eight-year high of 14.1%, indicating a focus on growth-enhancing investments.
Forces Driving Capital Expenditure
- The advance release of monthly tax devolution and timely fund disbursements for the special scheme on capital assistance contribute to increased capital expenditure.
- States' own tax revenues and non-tax revenues have grown at 11.5% and 19.5%, respectively, during the first eight months of the fiscal year.
- The efficiency of tax administration and increased formalisation of the economy is reflected in the faster growth of own tax revenues compared to nominal GDP.
- Mining industry revenue, a significant part of the state's own non-tax revenues, has benefited from reforms such as e-auction of mining leases, etc.
Challenges
- Overall revenue receipts have grown at a slower pace (5.5%) due to a 29.2% decline in grants from the Union government.
- States are hence resorting more to market borrowings, reaching a record Rs 5.8 trillion during the first nine months, but largely utilised for capex.
- Achieving the aggregate fiscal deficit target of 3.1% of GDP might be challenging, with a possible slippage of 20-30 basis points.