Capital outlay of top 18 states to grow by 18-20% this fiscal on healthy GST collection, central devolutions and interest free loan

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India’s top 18 states are expected to record a growth in capital outlay by 18-20 per cent on-year this fiscal, following ~14 per cent growth in fiscal 2023, said an analysis report by CRISIL Ratings. These states account for ~90 per cent of the aggregate gross state domestic product of all states.

According to the report, the increase in spending will be driven by healthy goods and services tax (GST) collection, stable and upfront devolution from the central government (share in central taxes, or SICT), and allocation of Rs 1.3 lakh crore (Rs 1 lakh crore budgeted last fiscal) in the form of interest-free loans to all the states for capital expenditure (capex).

“This fiscal, states have budgeted a strong ~43 per cent increase in their capital outlays from fiscal 2023 levels. If actual spending continues at past averages of 82-85 per cent of the budgeted outlay, it would translate to 18-20 per cent growth this fiscal. Here, we expect elections in some states, funding support from the Centre in the form of advance payment of SICT, and strong GST collection to provide the impetus. For the record, capital outlays already rose ~52 per cent on-year in the first six months of this fiscal. But a moderation in pace is likely in the second half as the outlay is more evenly distributed this year,” said Senior Director, CRISIL Ratings.

Growth across sectors

In terms of sectoral mix, on average over the past five years, transport (especially roads and bridges) has 22-26 per cent share in the total capital outlays of states, followed by irrigation (15-20 per cent), water supply & sanitation (WSS) (15-20 per cent). Other segments such as energy, agriculture, rural development, health and education account for 3-6 per cent share each.

“The water supply & sanitation segment which includes housing and urban development, is expected to grow over 20 per cent on-year this fiscal. Central government schemes such as Jal Jeevan Mission, Swachh Bharat Mission, and Atal Mission for Rejuvenation and Urban Transformation, as well as state-specific outlays towards metro projects, infrastructure development for cities, and support provided to urban local bodies, will spur growth in this segment. Irrigation segment is also expected to see a strong uptick of 19-21 per cent led by increasing budget by key states. Also, some states are expected to see higher allocation on a low base,” said Director, CRISIL Ratings.

Further, the transport segment, which has seen healthy growth over the past five fiscals, is likely to grow 14-16 per cent on-year this fiscal. States taking up construction and widening of roads under state-specific schemes and the Pradhan Mantri Gram Sadak Yojana would contribute to this, bolstered by higher allocation amid elections in key states.

“We believe that government capex has a higher multiplier effect on economic output compared with the revenue expenditure. The multiplier works to ‘crowd in’ private investment, inducing increase in investments in the economy, contributing to economic growth and supporting the overall credit outlook for states,” it said. 

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