Higher Transfers from Government To Give a Leg-up to States’ Capex: India Ratings

India Ratings and Research (Ind-Ra) expects capital expenditure by states to get a push from the capital outlay of INR1 trillion in the FY23 Union Budget under the 'Scheme for Financial Assistance to States for Capital Investment'.

"States are allowed a fiscal deficit of 4% of GSDP in FY23, in accordance with the recommendations of the 15th Finance Commission. The capital outlay extended by the union government is over and above this limit. State governments play a significant role in bolstering a country's growth potential/performance through the creation of capital assets. Ind-Ra expects the FY23 union budget proposals to have a positive impact on the development of state infrastructure and thus economic development.

Tax devolution combined with the enhanced capital outlay will add to the fiscal space available for states to incur capex in FY23. However, states have to undertake reforms in certain key areas to be able to channelise borrowings over and above the 3.5% fiscal deficit/GSDP ratio," the ratings agency has said.

According to IndiaRatings, based on the historical track record, states in aggregate have incurred a higher level of capital expenditure than the union government.

"The share of capex by states averaged 2.7% of GDP, as against the union government's share of 1.7% during FY16-FY20. Despite the COVID-19 led lockdown and continued restrictions that halted capital works in the first year of the pandemic, capex by states was higher at 2.6% as per FY21 revised estimate (RE) than 2.2% of GDP (FY21 actual) by the union. Furthermore, states in aggregate incurred a higher proportion of its expenditure on capex (16.7%) than the union's share of 13.3%, on average, during FY16-FY20," the ratings agency has said.