States’ capex holds key to growth momentum

Source: The post “States’ capex holds key to growth momentum” has been created, based on “States’ capex holds key to growth momentum” published in “Indian Exoress” on  20th February 2026.

UPSC Syllabus: GS Paper-3- Economy

Context: After the Union Budget, State budgets provide a clearer picture of general government finances because States account for a major share of public spending in India. Analysis of 18 major States, which together contribute about 89% of India’s GDP, shows that although revenue growth has been weaker than expected in 2025-26, States’ capital expenditure is likely to grow significantly, which can support economic growth.

Current Trends in State Finances

1. Combined revenues of major States grew by only about 7.7%, which was far lower than the 22% growth projected in their budgets.
2. State GST collections grew by only around 3.3%, which limited revenue expansion.
3. Transfers and grants from the Union government were slightly lower than budget estimates, reducing fiscal space for States.
4. Because of modest revenue growth, States slowed their revenue expenditure growth to around 7%, which was much lower than budget projections.
5. However, capital expenditure grew strongly in the later part of the year, especially in the third quarter.

Importance of States’ Capital Expenditure

1. Capital expenditure creates long-term productive assets such as roads, irrigation systems, hospitals, and schools.
2. Capital spending has a higher fiscal multiplier compared to revenue expenditure because it stimulates investment and employment.
3. States account for nearly two-thirds of public capital spending in India, making their investment decisions crucial for growth.
4. Increased State capex helps improve infrastructure, which boosts private investment and regional development.
5. Strong State capex can offset any slowdown in Union government capital spending.

Factors Supporting State Capex Growth

1. The Centre’s 50-year interest-free capex loans to States have encouraged investment in infrastructure projects.
2. Improved fiscal discipline in revenue expenditure has allowed States to prioritise capital spending.
3. Continued spending momentum in the last quarter of the financial year could lead to 16-18% growth in State capex.
4. Higher excise duty collections and stamp duty revenues have provided some support to State finances.

Challenges Before States

1. Weak GST growth and lower-than-expected transfers from the Union government have constrained State revenues.
2. Rising welfare commitments and subsidies increase revenue expenditure pressure.
3. Many States face high debt levels, which limits borrowing capacity.
4. Regional disparities in fiscal capacity lead to uneven development.
5. Delays in project execution reduce the effectiveness of capital expenditure.

Way Forward

1. States must improve tax administration and expand GST compliance to increase revenues.
2. States should prioritise high-quality capital projects with strong economic returns.
3. Better coordination between the Centre and States can improve fund transfers and fiscal planning.
4. Public-private partnerships can help mobilise additional investment.
5. Fiscal responsibility laws should ensure sustainable borrowing while allowing productive capex.

Conclusion: States play a critical role in India’s public investment strategy. Even when revenues are weak, maintaining strong capital expenditure can sustain economic momentum, create jobs, and improve infrastructure. Therefore, prudent fiscal management combined with higher quality capital spending by States is essential for India’s long-term growth.

Question: “States’ capital expenditure is crucial for sustaining India’s economic growth momentum.” Discuss in the context of recent trends in State finances.