New Delhi: The combined capital spending of 13 major state governments in India is expected to grow by 13% to ₹6.5 trillion in FY25, below the budget estimate (BE) of ₹7.2 trillion, rating company Icra said on Wednesday.
A sluggish start to capital expenditure and an expected shortfall in revenue due to elections during April-May are likely to have contributed to the lower capex spending by the major states, Icra said in a presentation on state government finances in FY25.
"With a 13.5% contraction in capital spending during the first four months of FY2025 and heavy rainfall in some of the states in Q2 FY2025, capex by the states appears set for a back-ended surge in H2 FY2025,” said Aditi Nayar, chief economist and head of research at Icra. “Icra forecasts a double-digit 12.6% expansion in the combined capex of sample states in FY2025; nevertheless, this will be significantly lower than the growth of about 24% embedded in the FY2025 BE and the actual 19.6% increase seen in the FY2024 provisional actuals (PA)."
The major states are Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal.
Icra estimates the combined revenue deficit of the 13 states at ₹2.2 trillion in FY25, higher than the BE of ₹1.9 trillion, while their aggregate fiscal deficit is expected at ₹8.8 trillion, modestly higher than the ₹8.5 trillion BE.
It also expects the combined leverage (debt + guarantees) level of the 13 major states to inch up to 30% of gross state domestic product (GSDP) from 29.2% of GSDP in FY24, with continuing variation across the states.
Gujarat, Karnataka, Maharashtra and Tamil Nadu have adequate fiscal space to meet their budgeted capex in FY25 and Icra anticipates some undershooting by the remaining sample states, Nayar added.
Even after allocations to the Central Scheme for Special Assistance to States for Capital Investments were increased to ₹1.5 trillion, up from ₹1.3 trillion targeted in the interim budget, the complete utilisation of the funds remains uncertain due to the slow offtake in the early months, the rating company said.
In the FY25 budget in July, the Centre increased the allocation for interest-free loans to states for capital expenditure, enabling them to spend more on infrastructure and reform measures. However, a big chunk of these loans has been linked to economic reforms that the Centre has wanted the states to carry out since FY23.
Icra expects state tax revenues, a key driver of state finances, to grow 11.4%, trailing the optimistic 19.4% growth anticipated in the FY25 budget. It expects a modest 5.5% increase in sales tax collections during FY25, following a sluggish performance in FY24.
"After some tepidness in discretionary spending in Q1 FY2025, we are hopeful of a revival of rural demand in H2 FY2025 aided by a healthy kharif harvest," Nayar said. "However, we are circumspect of the sharp turnaround in the grants from the Centre, budgeted by several states in the sample in FY2025 following a double-digit contraction in this revenues stream in the provisional actuals for FY2024.”
According to the Icra estimates, the total debt of the 13 major states will rise to ₹70.4 trillion by the end of March 2025, equivalent to 25.6% of their GSDP.
