ICRA has projected that a sample of 13 state governments have a massive fiscal space of ₹7.4 lakh crore for capital spending in FY2023, 81 per cent higher than their capex of ₹4.1 lakh crore in FY2022 (according to the provisional actuals or PA).

This is also 29 per cent higher than their FY2023 budget estimate (BE) of ₹5.8 lakh crore.

The rating agency said the assessment is based on the funds that are likely to be available from the unconditional market borrowings of 3.5 per cent of gross state domestic product (GSDP), the interest-free capex loan to be provided by the government of India (GoI) to the state governments, and the additional power sector reform-related borrowings (0.5 per cent of GSDP), after setting aside the revenue deficits estimated by ICRA and the likely adjustment of off-budget borrowings of FY2022.

The 13 states covered by the analysis are Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal.

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The combined GSDP (at current prices) of these states accounted for nearly 85 per cent of India’s GDP (at current prices) in FY2021.

Aditi Nayar, Chief Economist, ICRA, said: “ICRA estimates that the 13 state governments have the fiscal space to incur capital spending of as much as ₹7.4 lakh crore in FY2023, rivalling the size of the GoI’s capex budgeted for this fiscal.

"While the availability of funds doesn’t appear to be a constraint in FY2023, the actual outgo incurred by these state governments in the early months of this fiscal has been rather muted. "

Off-budget borrowings

She observed that the state governments’ ability to ramp up execution, relative to the ₹4.1 lakh crore that was actually incurred in FY2022, will crucially determine whether the actual outcome turns out to be meaningfully higher than the budgeted ₹5.8 lakh crore.

The GoI has budgeted for a capex of ₹7.5 lakh crore in FY2023, which includes the ₹1 lakh crore interest-free loan to be provided to the state governments for capital spending for a period of 50 years.

The agency said the GoI would be adjusting the incremental off-budget borrowings raised by the state governments in FY2022, from their net borrowing ceiling (NBC), over a one- to four-year period, beginning in FY2023 and ending in FY2026.

ICRA estimated the combined revenue deficit of these 13 states at ₹2.1 lakh crore, higher than the ₹1.8 lakh crore each in FY2023 BE and in FY2022 PA.

Revenue shortfall

While tax devolution as well as the goods and services tax (GST) compensation grants are likely to exceed the amount budgeted by the states in FY2023, this will not fully offset the estimated shortfall in other revenues and the projected higher-than-budgeted revenue expenditure in this fiscal, it added.

“We assess that Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Tamil Nadu, Uttar Pradesh, and West Bengal (Sub-set A) will have adequate resources to fully fund or exceed their budgeted capex for FY2023.

"However, the fiscal space available for Haryana, Rajasthan, Kerala, Punjab, and Telangana (Sub-set B) appears to trail the capex budgeted for FY2023, by a varying extent, suggesting that additional revenue mobilisation and/or expenditure efficiency measures may be needed to boost capex," Nayar said.

Of these five states, the fiscal space assessed for Kerala and Telangana in FY2023 is curtailed on account of the adjustment of the incremental off-budget debt of FY2022, she added.

The 13 states had incurred a capex of ₹91,500 crore in April-July 2022, a low of about 16 per cent of the FY2023 BE.

Modest spending

Given the high year-on-year capex growth budgeted by many of the states in sub-set A, and the modest spending seen in the early part of the year, ICRA remains uncertain over whether their capital spending can meaningfully exceed the budgeted level.

Therefore, the ratings agency has assumed their capital spending to be in line with the FY2023 BE, except for Karnataka, for which a 10 per cent growth has been assumed over the FY2022 PA, as the FY2023 BE had projected a contraction.

For sub-set B, ICRA assumed that capex will be limited to the available fiscal space, which is lower than the FY2023 BE for the same.