Anticipated 9% Growth in States’ Capital Expenditure in FY25

State Capital Expenditure Shows Modest Growth in FY25

For the fiscal year 2024-25, it is projected that the capital expenditure (capex) of the states will increase by 9% to reach Rs 6.65 lakh crore, a significant decline from the 27% growth witnessed in the previous fiscal year (FY24). This adjustment comes as states strive to maintain fiscal deficits at 3% of their Gross State Domestic Product (GSDP). Sluggish growth in tax revenues alongside elevated levels of borrowing have influenced expenditure, although interest-free loans from the central government have somewhat supported capex levels.

A review conducted on the finances of 16 states revealed a 10.5% rise in tax revenue for FY25, totaling Rs 27.5 lakh crore, compared to a 13.2% increase in the previous year. The states analyzed include Madhya Pradesh, Andhra Pradesh, Uttar Pradesh, Maharashtra, Tamil Nadu, Gujarat, Haryana, Karnataka, Kerala, Odisha, Punjab, Rajasthan, Telangana, Assam, Chhattisgarh, and Uttarakhand.

Details of State Capex and Borrowings

The state capital expenditure incorporates Rs 1.3 lakh crore in 50-year interest-free loans provided by the Centre in FY25, a rise from Rs 89,000 crore in FY24. The capex figures for these 16 large states, which collectively account for 85% of the national GDP, suggest that the states have managed to somewhat limit their capex from their own funds to keep fiscal deficits manageable. The overall fiscal deficit for these states in FY25 is estimated at Rs 8.47 lakh crore, or 3% of GSDP, which is in line with the budget estimate of 3.2%.

Data from the Reserve Bank of India indicates that all states and Union Territories (UTs) together invested Rs 8.2 lakh crore in FY24 (including central assistance), a rise from Rs 6.7 lakh crore in FY23. For FY25, the budget estimation for capex by states and UTs was projected at Rs 10 lakh crore, a somewhat optimistic figure. The National Statistical Office’s advance estimates suggest that India’s economy is expected to grow at 6.5% in FY25, a decrease from the 9.2% growth in FY24.

Investment Demand and Fiscal Landscape

The decline in growth between FY24 and FY25 can largely be attributed to a slowdown in investment demand, which decreased from 8.8% to 6.1%. Additionally, government final consumption expenditure growth fell from 8.1% to 3.8% during this period. Throughout most of FY25, public capex from both the Centre and the states remained lackluster, largely due to the impending general elections and prolonged rainfall.

For FY25, the aforementioned states reported a 9.7% rise in revenue expenditure, amounting to Rs 35.2 lakh crore, compared to a 9.2% increase noted in FY24. Meanwhile, their total borrowings surged by 24.5% year-on-year to Rs 9 lakh crore, in contrast to a 26.2% growth rate in FY24. The slower growth in tax revenues resulted in a slight uptick in fiscal deficit to 3% of GSDP, compared to 2.9% in FY24 and 2.8% the previous year.