Capital expenditure of states shows improvement as year comes to a close

The ten biggest Indian states, in terms of economic size, have improved their capital expenditure outlay for FY23 so far, an analysis of data from April 2022 to January 2023 shows. However, for some of them, this improvement also comes in the form of counting wages and salaries for infrastructure work under capex, which most states (and the centre) don’t do.

Business Standard had earlier analysed data from the Comptroller & Auditor General of India (CAG), which showed that for the first eight months of FY23 (April-November), seven of the ten biggest states spent did not spend more in capex, either in absolute terms or as a percentage of full-year capex targets set in their respective budgets, compared to the same period last year. Only Gujarat had spent more in absolute terms and as a percentage of the full-year target.

Now, for April-January, a review of the same data shows that five states – Maharashtra, Gujarat, Uttar Pradesh, Karnataka and West Bengal – have spent more in absolute terms and also as a percentage of budget targets, compared to April-January FY22.

As the chart shows, the biggest improvement year-on-year (YoY) has been by Uttar Pradesh, Maharashtra, Gujarat, and Karnataka, while Andhra Pradesh and Telangana are the ones who have spent much less compared to the same period last year.

The improvement among most of the big states comes amidst a renewed thrust by the centre to boost public sector capex. Finance Minister Nirmala Sitharaman has set the centre’s FY24 capex target at a record Rs 10 trillion. The government is counting on public spending in infrastructure, by the centre, PSUs and states, to drive growth at a time of increased global economic uncertainty.

While the centre has been supporting states to ramp up capex – by giving them long-term, interest-free loans – since 2021-22, one of the issues has been that states may have taken time to ramp up capacity.

Officials and independent economists admit that states don’t usually have the capacity to execute large, high-multiplier projects, something which the centre has had a long experience in implementing.

“Capex is for long-gestation projects which may pay dividends electorally much later down the line. Spending on welfare schemes brings immediate political dividends for many state governments,” a senior central government official told Business Standard.

As the above chart shows, a number of states have also been counting wages and salaries on workers who build projects under capex. The largest such outlay for April-January FY23 has been by Madhya Pradesh, Telangana, Andhra Pradesh and Maharashtra.

In a bid to improve the capex-spending ability of states, for the first time ever, the centre has tied part of the Rs 1.3 trillion capital expenditure support to states with their own capex targets. These capex targets, for the coming financial year (FY24), have been set by the centre itself.

If any state fails to meet these capex targets at the end of FY24, then part of the long-term interest-free capex loans given to them by the centre will be deducted in FY25, as per the guidelines sent by the Finance Ministry’s Expenditure Department to the states in February.

In a bid to revive economic activity, states were told to push capex during Covid-19, on the basis that they would be given permission by the centre to borrow more from the markets. The capex targets given to states by the centre for FY24 are not tied to borrowing. Also, the states’ capex targets, whether set by the centre or presented by the states in their budgets, should exclude the support given by the centre.