Introduction

This fiscal year (FY24), 18 of the largest states of India, accounting for 90% of the aggregate gross state domestic product of all states, have budgeted a strong 43% increase in their capital outlays from fiscal 2023 levels. If actual spending continues at past averages of 82–85% of the budgeted outlay, it will translate to 18–20% growth this fiscal year. The growth comes on the back of 14% growth in FY23.

Source of funding:

Healthy GST collection (15% buoyant), disbursement from the central government (of their shares in central taxes (SICT), and a higher allocation of Rs. 1.3 lakh crore in the form of an interest-free loan) to all states for capex will fund the increase in spending.

Major types of Capex

• Infrastructure development
• Defence and security
• Social sector spending
• Rural development
• Public sector enterprises

Avenues of expenditure:

Over the last five years, the distribution of capital expenditures among different sectors indicates that transport, particularly roads and bridges, consistently represents 22-26% of total state capital outlays. Following closely are irrigation (15–20%) and water supply and sanitation (15–20%). Other sectors like energy, agriculture, rural development, health, and education each contribute 3–6%.

The transport sector has experienced robust growth in the past five fiscal years, and experts project a continued 14–16% year-on-year growth in the current fiscal year. States actively engage in the construction and expansion of roads through state-specific initiatives and the Pradhan Mantri Gram Sadak Yojana, contributing to this growth. States are expected to allocate increased funds, particularly during key state elections, to strengthen this expansion further.

Government capital expenditure has a more significant multiplier effect (1.5-3 times) on economic output compared to revenue expenditure. This multiplier effect is instrumental in attracting private investment, stimulating increased investments in the economy, thereby fostering economic growth and positively impacting the overall credit outlook for states.

Reasons for increasing Capex

• Promoting economic growth: Capital expenditure is critical for promoting economic growth by creating demand for goods and services, boosting private sector investment, and increasing employment opportunities. By investing in infrastructure, the government can provide the necessary framework for businesses to grow and thrive.

• Improving public services: Capital expenditure is required to build and upgrade public facilities such as hospitals, schools, and water supply systems, and provide necessary equipment and supplies. This investment in public services is crucial for improving the quality of life of citizens and promoting social and economic development.
• Infrastructure development: It is critical for promoting trade, commerce, and investment, and improving the country’s overall competitiveness. By investing in infrastructure, the government can create new economic opportunities, support the growth of existing industries, and attract foreign investment.
• Creating employment opportunities: Capital expenditure creates employment opportunities in the short term through the construction of infrastructure projects and in the long term by supporting economic growth and promoting private sector investment.
• Attracting private sector investment: The government’s emphasis on Capex can also help attract private sector investment by providing the necessary infrastructure and a favourable business environment.

Way forward

States need to prioritize timely and efficient execution of capital expenditure and fully utilizing budgeted capital amounts uniformly throughout the year. The RBI report, while acknowledging that Indian states made higher capital outlays in 2022-23, notes that states would do well to mainstream capital planning rather than treating them as residuals and first stops for cutbacks in order to meet budgetary targets.

Read Further Capital Outlay Budget Ananlysis Significance of increased capital expenditure