State governments maintain capex pace in FY24

A few themes stand out while parsing through the provisional data on FY2024 fiscal indicators of the State governments and their use of RBI’s liquidity facilities.

One, lower grants dampened the growth of aggregate revenue receipts of the State governments, but a disciplined rise in the revenue expenditure allowed the momentum of growth of capital spending to be maintained.

However, some States tapped into RBI’s iquidity facilities more frequently in FY2024 than in FY2023, hinting at a tight cash-flow position.

The combined revenue receipts of the 23 States governments (excluding Arunachal Pradesh, Goa, Manipur, Mizoram and Sikkim) rose by 7.4 per cent as per the provisional actuals (PA) for FY2024 published by the Comptroller General of India.

This was the slowest pace of YoY revenue growth recorded by the States since the Covid-induced contraction in FY2021. A key culprit was the sharp 22 per cent YoY decline in grants from the Centre in FY2024, as both GST compensation grants and Finance Commission (FC) grants were lower from the year-ago level.

However, States received a pleasant windfall in the form of the release of an additional ₹250 billion as tax devolution in March 2024. This was in excess of ₹11 trillion included by the Centre in the revised estimates of FY2024.

Revenue spending slows

States’ overall moderate growth in the revenue receipts in FY2024 was mirrored in their revenue spending, which saw a limited YoY rise of 7 per cent. With this, the State governments’ revenue deficit was pared to ₹887 billion in FY2024 PA from ₹938 billion in FY2023. However, the rise in the capital spending led to the widening of the fiscal deficit of the 23 States to ₹8.4 trillion in FY2024 PA from ₹7.2 trillion in FY2023.

On the capital spending side, the 23 States were able to maintain the pace of 20-24 per cent YoY expansion in FY2024, in line with the trend in recent years. While several States saw a healthy rise in their capital spending, Punjab’s capital spending declined sharply by 36 per ccent in FY2024 PA. Possibly, the cessation of the GST compensation grants has dented the Punjab’s revenue receipts more deeply than the other States. Punjab suffered a permanent loss of revenues on certain items, on which it used to levy agricultural cesses/fees prior to the GST regime, which is no longer permitted.

Encouragingly, the pattern of States’ quarterly capital spending became less back-ended in FY2024. Nearly 39 per cent of the total capital spending in FY2024, was incurred in H1 FY2024 compared to 26-35 per cent in the recent years. The upfronting of capital spending appears to have benefited from the early disbursals of funds by the Centre to the States under the interest-free capex loan scheme.

The Centre had modified the guidelines for availing the funds under the capex loan for FY2024, to encourage less back-ended utilisation. Notably, Andhra Pradesh (AP), Kerala and Punjab had not availed the capex loan until January 2024 as they had not fulfilled the required conditions.

Interestingly, some States tapped the Ways and Means Advances (WMA) and RBI’s overdraft (OD) facility more frequently in FY2024 compared to FY2023. Kerala used the WMA for 126 days more in FY2024 over FY2023 while increasing its OD utilisation by 66 days.

The reported cut in the net borrowing ceiling of Kerala in FY2024 and drop in 15th FC recommended revenue deficit grant to Kerala in that fiscal may have tightened the liquidity position.

Punjab, which did not utilise the WMA and OD window during FY2022-23, accessed it for 105 days and 16 days, respectively, in FY2024. This could have been a fall out of lower grants (revenue deficit and GST compensation grants).

AP, Telangana and Jammu and Kashmir accessed funds under the WMA window and OD for extended periods of time in FY2024.

Going forward, a higher tax devolution in the final FY2025 Union Budget relative to the ₹12.2 trillion included in the Interim Budget could boost the resource availability of the state governments for capital spending. The Centre has already stepped-up the tax devolution in June 2024 to ₹1.4 trillion from ₹699 billion each in April-May 2024.

Additionally, the Centre may enhance the allocation of the capex loan scheme in the FY2025 final Budget. Nevertheless, a larger number of States would need to fulfil the conditions necessary for availing the funds under the latter in FY2025, to reduce their reliance on the WMA and/or OD facilities.

The writer is Chief Economist, Head- Research & Outreach, ICRA