States’ capital expenditure likely declined by 14% on year in the first two months of the current financial year compared with a whopping 90% rise in the year-ago period, largely due to a slowdown in spending in some states on account of elections and lower growth in tax revenues.

A review of the finances of 24 states by FE, showed that their capex in FY24 rose to Rs 7.16 trillion compared with Rs 5.68 trillion in the previous year, up 26%.

A review of the finances of 20 states by FE, showed that their capex in April-May of FY25 declined to Rs 47,381 crore compared with Rs 54,929 crore in the year-ago period.

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The states reviewed are Uttar Pradesh, Madhya Pradesh, Andhra Pradesh, Maharashtra, Tamil Nadu, West Bengal, Bihar, Gujarat, Haryana, Karnataka, Kerala, Odisha, Punjab, Rajasthan, Telangana, Assam, Chattisgarh, Jharkhand, Uttarakhand and Himachal Pradesh. These states account for around 90% of the GDP.

Sensing the resource crunch of the states, the Centre front-loaded tax devolution to states by releasing two instalments amounting to Rs 1,39,750 crore on June 10 for the month, instead of one regular instalment.

In recent years, public capex led by the Centre, states and CPSEs have been playing a crucial role in boosting economic activity as broader private investment remained subdued.

The 20 states under review reported an 11% growth in their tax revenues in April-May of FY25 at Rs 4.27 trillion compared with the 19% growth recorded in the previous year period.

Weaker growth in tax revenues forced the states to borrow more on year. Their borrowings rose 27% on year to Rs 1.25 trillion in April-May FY25 as against an 11% growth seen in the year-ago period.

The states under review reported a 14% annual increase in revenue expenditure in the first two months of FY25 to Rs 5.6 trillion compared with the 12% growth seen in the previous year.

Besides, frontloading of tax devolution, interest-free 50-year loans from the Centre for Capex could help the states increase their capex going forward.

States’ capital expenditure likely rose 26% on year in FY24 compared with a 12% rise in FY23, supported by the Centre’s interest-free loans and their robust revenue growth.

The state capex includes Rs 1.09 trillion in 50-year loans given by the Centre in FY24 compared with Rs 0.81 trillion in FY23. For FY25, the Centre has made a provision of Rs 1.3 trillion in the interim budget.

Thanks to higher tax devolution and tax collections, the states’ aggregate fiscal deficit has been reined in below 3% of GDP in the last three years.