States’ capex down annually despite March spike; tax transfers by Centre, GST aid help avoid a sharper fall

 







Despite the guaranteed growth in Goods and Services Tax (GST) revenue, state governments have seen a dip in overall tax buoyancy in the last couple of years, causing them to curb capital expenditure and under-perform in comparison to central public sector undertakings (CPSEs) and even the Centre, the other two pillars of public capex.

This amounted to bucking the trend of several immediate past years, when states had turned in a better show in fiscal consolidation and capital spending, maintaining a public capex ratio of Had the Centre not given the states extra borrowing leeway and largely protected the GST compensation even while being itself hit by the pandemic blues, the states would have had to cut asset-creating expenditure even more sharply. Of course, the Centre has appropriated a larger part of the available fiscal resources in the last two years by using the cess/surcharge route, especially by hiking such imposts on auto fuels. This has been to the detriment of states’ fiscal powers.

According to an FE analysis of the finances of eight major states for FY21, their combined capex at Rs 1.44 lakh crore was down 0.4% on-year, compared with a negative growth of 7% in FY20.

Though the sample may not be representative enough, this seemed to indicate a sharp focus on capex by the states during March, the final month of the financial year. An earlier study by FE of sixteen states showed that their combined capital expenditure stood at Rs 2.16 lakh crore in April-February of FY21, compared with Rs 2.56 lakh crore in the year-ago period, down 18.5%.

The decline in capex by all states could turn out to be sharper going by the trends in April-February of FY21. Among the largest states, capex by Uttar Pradesh declined 29% on-year to Rs 32,197 crore in April-February FY21. Similarly, Maharashtra’s capex fell 27% on-year to Rs 17,180 crore in April-February.

In fact, for the fourth year in a row, aggregate capital expenditure by state governments is seen to have missed the annual targets. As regards the eight states reviewed by FE — Madhya Pradesh, Karnataka, Rajasthan, Odisha, Telangana, Punjab, Haryana and Uttarakhand — their capex was down 25% in FY21 from the budget estimate (BE) announced at the start of the year.

According to the RBI’s customary study of state finances, the total capex roll-out by all states stood at Rs 4.97 lakh crore in FY20, down 20% from the BE of Rs 6.22 lakh crore.

Clearly, additional transfers from the Centre by way of Rs 45,000 crore as tax devolution in excess of the Revised Estimate from the divisible pool due to improved tax receipts in March, eased the stress on states’ finances a bit. The states incurred much additional revenue expenditures in last fiscal year due to the welfare steps taken as Covid relief. The eight states reviewed saw their revenue expenditure rising 4.3% on-year in FY21 while total expenditure rose 3.7% on-year. These states’ total expenditure achievement was 92% of target in FY21, much better than 85% of target achieved in FY20.

When data for more states flows in, the extent of the drop in state capex will be more evident. The FY21 capex target for all states as per their BEs was Rs 6.5 lakh crore, up 30% on-year. State capex is believed to have a greater multiplier effect on the economy, than such spending by the Centre and public sector undertakings.

Despite extra central tax devolution over RE, tax revenues of the eight states were down 26% from the FY21BE. Borrowings by these states were 111% of FY21 target at Rs 2.7 lakh crore compared with almost 100% of Rs 2.08 lakh crore target achieved in FY20.

While states fell short of target, the Centre is understood to have achieved its FY21 revised capex target of Rs 4.39 lakh crore (up 30.8% on-year). In recent months, the Centre has indeed stepped up spending to support the economy and also successfully roped in CPSEs in the venture, but the revenue-starved state governments have been forced to slow their capex.5:3.6:3.4 (states, CPSEs and Centre in FY20).



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