States' capex may cross 3% of GSDP

Capital expenditure of states could cross 3% of gross state domestic product in 2023-24, following the Centre's capital spending push in the annual budget, showed an ET analysis of 16 states.

The analysis revealed that the capex of the 16 states, which account for 80% of the GDP and the total expenditure of the states, could be about 20% higher than in the current financial year.

The combined capex of the 16 states and the Centre is expected to be 5.9% of the GDP, as they could spend close to ₹18 lakh crore on capital activities. In the pre-Covid-19 2019-20, the combined spending of the Centre and these 16 states was 4% of the GDP.

In the 2023-24 budget, the Centre increased capex 37% and allocated Rs 3.7 lakh crore for grants to states for the creation of capital assets, an increase of 13% year-on-year.

The Centre is expected to spend 3.3% of the GDP on capital expenditure next fiscal, slightly higher than the states' spending.

Traditionally, states' capex as a proportion of GDP has been higher than the Centre's, but the trend has changed since the pandemic.

"As per the Medium Term Fiscal Framework, states should be doing 3%, as the revenue deficit should be zero. Historically, they used to do more because so much of the funding came from the central government," said NR Bhanumurthy, vice chancellor, Dr BR Ambedkar School of Economics University, Bengaluru.

In terms of the total budget outlay, the share of capex for the 16 states will be 16.2% in 2023-24. The corresponding share for the Centre is expected to be 22.2%.

Since 2020-21, the Centre's capex as a proportion of its total expenditure has been higher than that of the states. While the share of states' capex in total expenditure was 15.9% from 2014-15 till 2019-20, the Centre's share was a lower 13.1%. But since 2020-21, the Centre's average capex share has been 16.8% while that of states has been 14%.

Bhanumurthy said the lower allocation for capex might arise due to the states' willingness to go for easy avenues for spending. "That is why some states are going for the old pension system; it is an easy way to spend. Capex spending is difficult," he said.

The pull back from the Centre is another significant reason, he said, adding, "Owing to higher devolution, states have been asked to spend more on the social sector. The central government has withdrawn from some of the areas, which may have led to larger committed expenditure."