Despite a slow start, States’ capex likely to rise further this year

Highlights:

• The recent developments regarding capital expenditure (capex) by Indian states reveal both challenges and optimistic projections for economic growth in the country. Here’s a detailed breakdown of the situation:

Current State of Capital Expenditure

Initial Decline in Capex:

• As of August 2024, capital expenditure by states has declined by 7% compared to the previous year. This drop has been attributed to the general elections taking place in the first quarter of 2024-25, which often divert attention and resources from developmental projects.

Concerns from the Finance Ministry:

• The Finance Ministry highlighted lower capex spending by states as an early warning sign of economic strain. Other signs included a decrease in passenger vehicle sales, suggesting a cooling economy.

Projections for Recovery

Crisil Ratings Forecast:

• Crisil Ratings anticipates that the capex outlays of India’s top 18 states, which account for about 94% of state capital spending, will rise between 7% to 9%, reaching around ₹7.2 lakh crore compared to ₹6.7 lakh crore in 2023-24.
• The growth in capital outlay is projected to be about 90% of the budgeted targets for the fiscal year, showing improvement over the previous five years, where achievement rates were around 82%-84%.

ICRA’s Outlook:

• ICRA has similarly projected a 13% increase in capital spending among 13 major states, reaching about ₹6.5 lakh crore. This figure is slightly lower than the budgeted estimate of ₹7.2 lakh crore for these states.
• Factors influencing ICRA's forecast include a slow start to capex in the early months of 2024-25 and expected undershooting in state revenues.

Key States with Fiscal Capacity:

• Economists from ICRA noted that states like Gujarat, Karnataka, Maharashtra, and Tamil Nadu have sufficient fiscal space to meet their budgeted capex plans, indicating regional disparities in fiscal health.

Factors Influencing Capital Expenditure

Increase in Borrowings:

• Evidence suggests a significant increase in states’ borrowings, which surged 26% year-on-year in the second quarter of 2024 after a 15% decline in the first quarter. This uptick in borrowing may provide the necessary funding for increased capital expenditure.

Capex as a Percentage of GSDP:

• The capital outlay for these states is projected to be 2.4% of their Gross State Domestic Product (GSDP), consistent with the previous year when capex grew by 27%. Variations in growth rates among states are anticipated, with potential slowdowns in economic activity or increased revenue spending affecting these projections.

Prelims Takeaways

• CRISIL Ratings