State investment spending slows in Q1 amid delayed market borrowing


Amid an increase in demand and capacity utilization in the industry, state governments appear to have calibrated their capital spending. Combined capital expenditure of twenty states whose finances were reviewed by FE fell 9% year on year to 55,0057 crore rupees in the June quarter. These states, which account for about 80% of the country’s gross domestic product (GDP), had seen a massive investment growth of 118% in the first quarter of FY22, thanks in part to a favorable base.

States have regulated capital spending, bucking the accelerating trend of recent years due to revenue concerns after the cessation of the Goods and Services Tax (GST) offset. In addition, many states’ market borrowings were impacted by the delay in Center approvals. While most states secured borrowing agreement from the Center in June, borrowing by these 20 states fell by 71% year-on-year to Rs 37,531 crore in the first quarter of FY23.

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Combined tax revenue for the 20 states, however, was Rs 4.46 trillion in the first quarter of FY23, up 37% year on year, compared to the 43% growth seen by them in the first quarter of FY23. quarter of the previous year.

The Center cut Rs 41,000 crore from the FY23 aggregate net borrowing ceiling for states for resorting to off-balance sheet loans in FY22, which would impact eight states, including Uttar Pradesh, Telangana and Kerala (these states also saw lower capital spending in Q1FY23). The move is part of a tightening of standards aimed at discouraging fiscal indiscipline by states, many of which resort to debt through parastatals to fund government programs and capital spending.

The Center announced the early release of GST compensation to states through May 31 to help their capital expenditures. Anticipating a decline in capital spending, the Center is also providing a subsidized loan of Rs 1 trillion, 80% of which is a 50-year unconditional interest-free loan, to states to maintain the momentum of capital spending. As states tap into that ease, their capital spending could start to improve from the second quarter of FY23, analysts said.

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Government investment spending is considered to have a higher growth multiplier potential than central budget/CPSE investment spending. While the Centre’s budget capital expenditure increased by 57% year on year to Rs1.75 trillion in April-June of FY23, a conscious effort is being made by the government to ensure that the CPSEs/departmental arms (which achieved Rs 1.37 trillion or 21% of their annual target in Q1FY23) is accelerating investments.

The states reviewed are Maharashtra, Uttar Pradesh, Madhya Pradesh, Karnataka, Gujarat, Odisha, Telangana, Kerala, Rajasthan, West Bengal, Punjab, Bihar, Chattisgarh, Haryana, Jharkhand, Uttarakhand, Himachal Pradesh, Tripura, Sikkim and Nagaland.

All 20 states saw revenue spending increase 13% year-on-year in Q1FY23, recording steady year-on-year growth.

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