States capex. Capital expenditure of States more than doubles to ₹1.71-lakh crore as of Q2

With the debilitating impact of the second wave of the Covid-19 pandemic restricted to the first quarter of FY22, most States seem to have improved their spending on capital expenditure in the second quarter. The Centre’s constant nudging of State governments to invest more in public infrastructure also seems to have helped.

A BusinessLine analysis on the spendings of 27 State governments and union territories (UTs) shows that capital expenditure of several States witnessed a strong growth in the second quarter of the current fiscal.

On a sequential basis, the combined capital expenditure of these 27 States/UTs more than doubled to ₹1.71-lakh crore at the end of Q2 FY22. Their combined capex outlay at the end of the first quarter stood at ₹69,802 crore.

State-wise split

Uttar Pradesh topped the list of States with the highest capital expenditure at ₹23,803 crore, more than doubling from ₹9,734 crore in the first quarter. It was followed by Madhya Pradesh (₹18,804 crore), Telangana (₹15,078 crore), Karnataka (₹13,957 crore) and Tamil Nadu (₹11,402 crore). All recorded a jump of two to five time in capital expenditure on a Q-o-Q basis.

The capital expenditure of Maharashtra, the largest contributor to India’s GDP, witnessed an eight-fold jump to ₹8,713 crore as the State, which was badly hit by the second wave of the Covid-19 pandemic, recorded a capex of just ₹1,148 crore in the first quarter.

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States like Madhya Pradesh, Telangana, Rajasthan, Kerala, Haryana and Nagaland have already achieved 40–50 per cent of their annual budgeted capex by the end of second quarter.

On a half-yearly basis, the combined capex of these 27 States stood at ₹1.71-lakh crore between April-September, higher than ₹1.46-lakh crore spent during the same period in pre-Covid FY20.

High targets

The cumulative capex budget for these 27 States for FY22 stands at ₹6.41-lakh crore. As of September 2021 quarter, these States have collectively spent ₹1.71-lakh crore — 27 per cent of total budget estimate. Overall capex performance has been dragged down by States like Uttar Pradesh and Maharasthra which had a huge budget estimate but failed to achieve even a quarter of that target.

For instance, Uttar Pradesh has the highest capex budget in the country at ₹1.14-lakh crore. The State, despite being the highest capex spender, has achieved only 21 per cent of its budgeted capex at the end of Q2. Similarly, despite a significant jump in capex spending, Maharasthra has achieved only 14 per cent of its capex budget of ₹60,300 crore as of September 2021.

Multiplier effect

In a recent report ‘Capex towards apex’, ratings agency Crisil said India’s public capital expenditure (of Centre and States) is progressing at a rapid clip and its multiplier effect can’t be far behind.

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In the aftermath of the pandemic, the Centre has been constantly nudging State governments to spend more on capital expenditure, which has a high multiplier effect, ability to crowd-in private investments, increase employment opportunities and spur overall economic growth.

In its 2019 monetary policy report, the Reserve Bank of India cited several research studies to highlight that multiplier effect. The RBI said that every rupee on capex spent by the Centre has a multiplier effect of 3.25 on output while every rupee spent on capex by States leads to an increase in output by two rupees.

Besides this, capital expenditure of States is considered to have a higher multiple effect on the economy relative to the centre since State’s projects are more rooted to the local economy.

Incentivising States

Keeping this in mind, the Centre has been incentivising States to spend more on capex through various methods including enhanced ceiling for borrowings, interest free loans, and front-loading the share of devolution to the States.

In October 2020, the Centre announced the “Special Assistance to States for Capital Expenditure” scheme as part of the Atmanirbhar Bharat package. Under this, the Centre approved capital expenditure proposals to the tune of ₹11,912 crore to fund projects in sectors like health, rural development, water supply, irrigation, power, transport, education and urban development.

Additional borrowings

States have also been permitted to make additional borrowings equivalent to 0.5 per cent of their gross state domestic product (GSDP) subject to achieving certain milestones — they must achieve at least 15 per cent of the capex target for FY22 by the end of Q1, 45 per cent by the end of Q2, 70 per cent by the end of Q3, and 100 per cent by the end of the fiscal year.

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Accordingly, in September, the Centre allowed eleven States that achieved the first quarter target to tap ₹15,721 crore of additional borrowing. In the second quarter, seven States became eligible and were allowed to borrow an extra ₹16,691 crore. In total, States have been allowed an additional borrowing of ₹32,412 crore.

Tax devolution

Last month, the Centre also released two instalments of tax devolution to State Governments amounting to ₹95,082 crore against normal monthly devolution of ₹47,541 crore. Tax devolution to States is done in 14 instalments every year and adjustments as per the revised estimates (RE) happen in March. By front-loading the tax devolution, the Centre aims to put more cash in the hands of State governments to help them achieve their capital expenditure targets.

Uttar Pradesh (₹17,056.66 crore), Bihar (₹9,563.30 crore), Madhya Pradesh (₹7,463.92 crore), West Bengal (₹7,152.96 crore), Maharashtra (₹6,006.30 crore), Rajasthan (₹5,729.64), Odisha (₹4,305.32), Tamil Nadu (₹3,878.38), Andhra Pradesh (₹3,847.96) and Karnataka (₹3,467.62) are the top 10 recipients accounting for 72 percent of the total devolution.

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Despite various incentives, around 18 States including Uttar Pradesh, Maharashtra, Bihar, Andhra Pradesh, Odisha and several northern-eastern States have hit less than a quarter of their annual capex budget for FY22.

Mounting pressure

In its recent report on State capex, Care Ratings said that if States have accomplished only a quarter of the overall targets, there would be pressure in the second half to really push the economy along.

CRISIL Research said it expects States to meet 80-85 per cent of their capex target this year.

“If States spend as per targets this year, their total capex will cross the decadal trend by the end of this fiscal. That will require a 45 per cent on-year growth in State capex in the second half (compared with 78 per cent in the first half). This could be a tall order,” the rating agency said.