State budgets may be too optimistic about their capital expenditure

Source: The post is based on the article “State budgets may be too optimistic about their capital expenditure” published in The Indian Express on 30^th March 2023.

Syllabus: GS 3 – Budgeting

Relevance: analysis of states’ budget.

News: Many states have come with their state budget. The article discusses the trend emerging out of the budget of the states.

What are the different trends emerging from the states’ budget?

First, states have estimated their revenue receipts to grow at a slower pace in the coming financial year. States expect their revenue growth to slow down from 19 percent in 2022-23 to around 13 percent in 2023-24. This is due to the expectations of a slowing economy.

Second, some states, such as Bihar and Telangana, expect their own tax and non-tax revenues to grow more rapidly in the coming fiscal year. These earnings are so large that they exceed the nominal GDP growth anticipated in the Union budget.

This higher revenue estimate comes at a time when the RBI expects a drop in economic growth from 7% in 2022-23 to 6.4 percent in 2023-24. Therefore, any shortfall in the revenue collection would affect the capex of the state.

Third, some states have forecasted much slower spending growth in the coming fiscal year. Spending, which was above 20% in 2022-23, is anticipated to fall to 10% in 2023-24.

States are expected to spend 1 percent of their GSDP on transport, 2.5 percent of GSDP on health, nutrition, social and family welfare.

Some states have also continued to prioritize debt management. While state spending on committed expenditures (salaries, pensions, and interest payments) is expected to increase at approximately the same rate as last fiscal year.

Fourth, even though most of these states anticipate their revenue deficits to shrink in the coming year, the budget does not call for significant fiscal consolidation. This means that a larger percentage of state borrowings will be used to fund capital spending. Further, most states do not expect a sizeable reduction in their debt to GSDP ratios in the coming years.

Fifth, Capital expenditure by states is expected to rise above 3% of GSDP, exceeding revenue expenditure in the coming year. This is consistent with the central’s government’s expenditure priorities.

A higher budgetary allocation over capex is good but still concerns of remain.

What are the concerns with capital expenditure?

As per ICRA’s estimates, states have spent just around half of what has been budgeted for, in the first 10 months of the year (April-January). This implies that states are unlikely to achieve their capex targets for the year.

Further, spending patterns of the states will depend on their revenues and therefore, an inability to meet this year’s targets will also raise questions over whether the targets for next year can be met or not.

What is the way ahead?

States account for a sizeable share of public sector investments in the economy. Hence, slower growth in state capex implies that the overall public sector growth will be weaker both this and the next year.