State Expenditure Surge: A Catalyst for Economic Growth

In response to the fiscal challenges brought about by the Covid-19 pandemic, state governments in India have undergone a transformative fiscal consolidation.

The Background and The Numbers

• The shift is notable in the fiscal deficit, which remained below 3 percent of the Gross Domestic Product (GDP) in both 2021-22 and 2022-23, despite increased borrowing capacity granted by the Union government.
• State governments play a pivotal role in India's fiscal landscape, contributing significantly to overall government expenditure.
• Accounting for over three-fifths of total general government spending, states have historically emphasized revenue expenditure, covering aspects such as salaries, pensions, interest, and subsidies.
• However, a notable shift occurred in 2023-24, with a discernible increase in capital expenditure.

Need for Capital Expenditure:

• The surge in capital expenditure by states during April-November 2023 reflects a strategic pivot in their spending priorities.
• While revenue expenditure grew modestly by 9.3 percent, the capital outlay witnessed a substantial 45.7 percent jump.
• This alteration is vital for economic growth, as a higher ratio of capital outlay to total expenditure, reaching an eight-year high of 14.1 percent, indicates a greater proportion of funds directed toward productive assets.

Driving Forces behind Capital Expenditure:

• Firstly, the proactive release of monthly tax devolution and timely disbursements of funds for special capital assistance schemes by the Union government have played a crucial role.
• Notably, advance installments, traditionally released towards the fiscal year-end, were expedited in June and December of 2023.
• The Union government approved substantial capital expenditure and released funds under special assistance schemes, contributing to the surge in states' capital investments.
• Secondly, buoyant state revenues have added impetus to capital expenditure.
• States' own tax revenues and non-tax revenues have grown at robust rates of 11.5 percent and 19.5 percent, respectively, during the initial eight months of the year.
• This growth, outpacing nominal GDP growth, signifies efficient tax administration and increased formalization of the economy.
• However, the reliance on mining industry revenues remains unevenly distributed, benefiting mineral-rich states disproportionately.

Fiscal Challenges and Market Borrowings:

• Despite robust revenue growth, states face challenges due to a significant shortfall in grants from the Union government, resulting in an average 5.5 percent growth in overall revenue receipts.
• This discrepancy has led states to resort to increased market borrowings, reaching a record Rs 5.8 trillion in the first nine months of the year.
• While this has enabled higher capital expenditure, achieving the targeted aggregate fiscal deficit of 3.1 percent of GDP for states in 2023-24 may prove challenging.