Fiscal Challenges: Indian States Struggle to Meet Capex Targets Amid Revenue Decline

Several states in India are anticipated to miss their capital expenditure (capex) targets for the ongoing fiscal year due to a significant decrease in revenue and other factors, including upcoming polls. This information comes from an analysis that has been reported in various news sources.

The central issue causing this shortfall is a steep fall in revenue receipts, leading to major compression in state capex. During the first half of Fiscal Year 2024 (FY24), state capex rose to a record 35%. However, to maintain their budget estimates, 21 states, for which capex and other macro data are available, will need to maintain a capex run rate of 28% in the second half of the year. This is considered unlikely due to the model code of conduct expected to take effect in the March quarter before the general elections.

The combined revenue and fiscal deficits of these 21 states widened significantly in the April-September period of the current fiscal year. The revenue deficit increased from Rs 50,000 crore to Rs 70,000 crore, while the fiscal deficit expanded from Rs 2.4 lakh crore to Rs 3.5 lakh crore compared to the same period last year.

It’s noteworthy that the report excludes several states, namely Arunachal Pradesh, Assam, Goa, Manipur, Meghalaya, Mizoram, and Nagaland. Despite the challenges, the growth of combined revenue receipts and expenditure of these 21 states during the period under review trailed their budget estimates. However, their capital outlays and net lending were higher, boosted by early releases under the scheme for special assistance to states for capital investments (or capex loan) during the April-October period of the current fiscal year. This contributed to the increase in capex as a proportion of budget estimates to 35% in the first half of the fiscal from the previous years’ average of 30%.

The growth in combined revenue receipts of the 21 states slowed significantly to 8.4% in the period under review from 26.4% in the year-ago period. This slowdown was primarily due to a sharp contraction in grants from the Centre. The annualized growth of combined revenue expenditure of these states also eased to 9.6% in the first half from 15.5% a year earlier. Moreover, both revenue receipts and expenditure trailed the 18-19% expansion indicated in their budget estimates.

Barring Himachal Pradesh, Karnataka, Kerala, Punjab, and Bengal, the capital expenditure of the remaining 16 states expanded in high double-digits​​​​​​.



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