Eight states drove 23% growth in capital spending in Apr-Dec FY22, relative to pre-Covid levels: ICRA

25 Feb 2022 , 04:54 PM

ICRA highlighted that Andhra Pradesh, Madhya Pradesh, Nagaland, Punjab, Rajasthan, Tamil Nadu, Telangana and Uttar Pradesh have dominated the increase in state governments’ capital spending in April-December FY2022 relative to the pre-Covid period, as per the unaudited provisional fiscal data released by the Comptroller and Auditor General (CAG).

According to Ms. Aditi Nayar, Chief Economist, ICRA Ltd: “The revenue receipts of 24 state governments, whose provisional fiscal data is available, expanded by 8.6% to Rs18.5 trillion in Apr-Dec FY2022 from Rs17.1 trillion in Apr-Dec FY2020, benefitting from robust incremental own revenues of Rs1.7 trillion amidst a mild dip in Central transfers.

The revenue expenditure of this sample rose by a higher 13.9% in Apr-Dec FY2022, doubling their combined revenue deficit to Rs1.9 trillion from Rs0.9 trillion in Apr-Dec FY2020. An encouraging 23.0% expansion in capital spending was primarily driven by eight states, namely Andhra Pradesh, Madhya Pradesh, Nagaland, Punjab, Rajasthan, Tamil Nadu, Telangana and Uttar Pradesh. Overall, the sample’s fiscal deficit deteriorated considerably to Rs. 4.9 trillion in Apr-Dec FY2022 from the pre-Covid levels of Rs. 3.3 trillion.”

“Notwithstanding the sharp increase relative to the pre-Covid levels, our sample’s capital spending of Rs2.8 trillion in Apr-Dec FY2022, was equivalent to a modest 48% of the FY2022 budget estimates (BE). Actual capital spending in recent years has tended to be ~75% of the initial budgeted level. If this trend continues in FY2022, it would imply an outgo of Rs1.6 trillion in Q4 FY2022, lower than the amount recorded in the last quarter, in three of the previous four years. This appears realistic, as legislative elections in some key states in the ongoing quarter, may compress the actual spending relative to the trend seen in recent years.”

The combined own revenues (namely states’ own tax and non-tax revenues) of the 24 state governments increased by a sharp 18.0% to Rs. 11.0 trillion in Apr-Dec FY2022 from Rs. 9.3 trillion in Apr-Dec FY2020, led by both the tax and non-tax components. However, the devolution of taxes as well as the transfer of grants from the Government of India (GoI) to the 24 states in Apr-Dec FY2022 were a mild 3.6% and 1.4%, respectively, lower than the pre-pandemic levels.

The latter reflects the disbursement of Goods and Services Tax (GST) compensation as a mix of grants and back-to-back loans in FY2022 compared to the release of the entire amount as grants in FY2020. Regardless of the trend in Apr-Dec FY2022, the upward revision in Central tax devolution in the GoI’s revised estimates (RE) for FY2022 relative to the FY2022 BE would support the states’ fiscal metrics in Q4 FY2022.

In absolute terms, the total expenditure of the 24 states increased by Rs3.0 trillion (Rs. 2.5 trillion for revex and the balance for capex), twice as high as the rise of Rs1.5 trillion in revenues in Apr-Dec FY2022 from pre-Covid levels.

For six of the 24 states, i.e. Gujarat, Haryana, Jharkhand, Mizoram, Odisha and West Bengal, the capital spending during Apr-Dec FY2022 was lower than the pre-Covid levels. In contrast, for Andhra Pradesh, Madhya Pradesh, Nagaland, Punjab, Rajasthan, Tamil Nadu, Telangana and Uttar Pradesh, the increase in capital outlay ranged between a healthy Rs. 45-115 billion during the same period.

In Apr-Dec FY2022, the revenue receipts and revenue expenditure of the sample stood at a modest 58% and 62%, respectively, of the FY2022 BE. However, the revenue deficit for the first nine months of FY2022 was equivalent to a sharp 140% of the FY2022 BE. With capital spending restricted to 48% of the budgeted level, the fiscal deficit was relatively contained at 64% of the FY2022 BE.

Unaudited provisional actuals for Apr-Dec FY2022 are available for 24 Indian states, except Assam, Goa, Manipur and Meghalaya from the Comptroller and Auditor General (CAG).