State Expenditure Surge: A Catalyst for Economic Growth

Context

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.