Capital outlay of Indian States is expected to grow a moderate 4-6% this fiscal to ₹7.4-7.5 lakh crore, slower than 7% last fiscal and well below the decadal average of 11% as rising revenue deficit limits their financial flexibility, Crisil Ratings wrote in a report.
Water supply and sanitation including housing and urban development (WSS) and irrigation will continue to be the drivers of capital outlay, while the transport segment may see some moderation, it said.
Anuj Sethi, Senior Director, Crisil Ratings said “Higher increase in revenue expenditure will widen revenue deficit by 45-50% to ₹3-₹3.1 lakh crore this fiscal. This will lower fiscal space and borrowing capacity for carrying out capital outlays. With centre’s 50-year interest free capex loans to states remaining at similar level of ₹1.5 lakh crore, we expect growth in capital outlay to moderate to 4%-6% this fiscal.”
That would mean States achieving 80% of their budgeted outlay and capital outlay—as a percentage of gross State domestic product (GSDP)—will inch down to 2.2% this fiscal from 2.3-2.4% in the last two fiscals, he said.
Typically, states incur 23-27% of their capital outlay towards the transport segment for the development of roads and bridges, followed by irrigation at 18-22%. The WSS segment, accounting for 16-20%, is mainly supported by Centrally-sponsored schemes such as the Jal Jeevan Mission and Pradhan Mantri Awas Yojana, among others.
Government capex has a higher multiplier effect on economic output than revenue expenditure. Typically, that crowds in private investment, induces an increase in overall investments and contributes to economic growth, Crisil said.
Given their limited resources, the ability of the States to balance social expenditure with capital outlay will remain a key factor in assessing their credit outlook, it said.
A slowdown in GDP growth will bear watching, while better-than-expected tax buoyancy, including from the GST rationalisation or from higher grants from the central government, may result in lower borrowing or higher capital outlay, it added.