Will Sluggish Spending By States Dent The Economic Momentum?

According to data from state financial accounts compiled by BloombergQuint, overall revenue expenditure by the ten major states in the April-September period stood at Rs 9.14 lakh crore. On average, the ten states spent 41.5% of the budget estimate up to September 2021—a modest uptick from the 38.7% of budgeted amount spent in the same duration last year.

In comparison, the federal government has spent 47.7% of the planned revenue expenditure up to September 2021, compared with 49.9% a year ago.

The unaudited provisional accounts for states are available with the Comptroller and Auditor General of India. Among major states and union territories, data for West Bengal and Delhi was not available for September.

In the case of large and economically significant states like Maharashtra, Uttar Pradesh and Tamil Nadu, revenue expenditure has been below the 40% mark in the first six months of the year.

To be sure, states did see some improvement in spending in the second quarter.

For the 22 state governments for which data is available, revenue expenditure expanded by 13.1% in Q2 FY22, a step up from the 10.6% growth in Q1 FY22, said Aditi Nayar, chief economist at ICRA. The central government's non-interest revenue expenditure expanded by 15% on an annual basis in Q2 FY22, compared to the contraction of 7.3% in Q1 FY22, according to ICRA.

Similar trends emerge on capex spending by states.

Capital expenditure of the ten major states in the April-September period stood at Rs 1.26 lakh crore. On average, the ten states spent 33.7% of the budget estimate up to September 2021, while the central government spent 41.4% of its budget.

The central government has seen a healthy growth on a low base from last year when it had sharply curtailed spending, Nayar said. States did not have this benefit. Besides, states tend to over-budget for capex spending and are eventually unlikely to meet the targets, Nayar said.

Capital expenditure by states is critical for the economy, said Devendra Pant, chief economist at India Ratings & Research. On an aggregate, capex by states is almost two times the size of the capex by the central government, Pant said.

Spending on capex, like in the case of the federal government, is a function of the states receipts.

For the top 10 states, revenue collections amounted to Rs 8.1 lakh crore between April- September 2021. This made up 37.4% of the budget estimate on average for the ten states, compared to 31.5% for the same duration last year.

In order to give states comfort to spend, the central government has front-loaded transfers to them.

Earlier in November, the centre released two installments of tax devolution to state governments simultaneously, amounting to Rs 95,082 crore as against normal monthly devolution of Rs 47,541 crore, according to a press release by the Ministry of Finance dated Nov. 23, 2021.

The additional tranche of tax devolution to state governments and enhanced revenue visibility is expected to boost state spending, Nayar said.

Along with the additional tax devolution, the impact of which is likely to be seen with a lag, the additional borrowing permitted for states is also likely to help, said DK Joshi, chief economist at Crisil Ltd.

According to a press release by the Ministry of Finance dated Nov. 12, 2021, seven states—Chhattisgarh, Kerala, Madhya Pradesh, Meghalaya, Punjab, Rajasthan and Telangana—have become eligible to borrow an additional amount of Rs 16,691 crore.