Public expenditure quality of states improves in Q1FY24: Ind-Ra

Higher tax devolution coupled with rising revenues and lower subsidy outgoes helped improve the quality of public expenditure of states in the first quarter of FY24, according to an analysis by India Ratings and Research (Ind-Ra), which it said augurs well for the Indian economy.

Ind-Ra noted that the trend is likely to continue. “Front-loading of additional instalment of tax devolution and timely approval of projects under the interest-free capex loans by the union government (Rs 56,415 billion in June 2023) and buoyancy in own tax revenues would keep up the momentum of states’ capex,” said Paras Jasrai, senior analyst at the rating agency.

Of the 20 states analysed by Ind-Ra, 16 recorded higher capex spending compared to the previous year, with an over 70% jump compared to the previous year. The capital outlay to revenue expenditure ratio, a measure of the quality of states’ spending, increased to 13.9% in Q1FY24 compared with 8.5% in the first quarter of the previous fiscal.


“The front-loading of capex by the 20 states has been contrary to the trend witnessed historically, wherein a major chunk of capex used to be undertaken in the second half of a fiscal year,” Ind-Ra noted, highlighting that Madhya Pradesh, Andhra Pradesh and Gujarat were the significant contributors to the capex push.

However, Ind-Ra expressed concerns over states like Maharashtra, Karnataka, Himachal Pradesh and Chhattisgarh witnessing a dip in capex share.

“The significant fall in the share of Karnataka and Maharashtra in the aggregate capex during the same period may become a concern if it persists in the remaining quarters of FY24,” it pointed out.

The report noted that the fiscal performance of the states also improved, with the fiscal deficit coming in 2.3% lower compared to the previous year. Moreover, nine of the 20 states recorded a fiscal surplus.

The fiscal position improvement was due to a 21.8% rise in revenue receipts in Q1FY24. States' own tax revenue grew 12.3%, whereas central transfers were up 58.9%.

States would also need to be prudent in spending. In the first quarter, spending on subsidies was down 7.3% from the previous year, whereas salary payments were 15.8% lower. Pension and interest payments were up during the year.

“Generally, the states tend to align their revenue expenditure with revenue receipts,” Ind-Ra pointed.