Despite support from Centre, big states lagged on capex in FY23

Due to crucial state elections in 2022 and 2023, many state administrations chose to focus on scheme and subsidy spending

In the backdrop of private sector investment plans taking a hit due to the Covid-19 pandemic, it is the public sector that has been bearing the weight of capital expenditure and new infrastructure spending in the Indian economy in the past few years.

Chief Economic Advisor V Anantha Nageswaran said last month that in the last 10 years, public sector capital investment has increased from Rs 6.8 trillion to Rs 21.2 trillion, at a time when the financial sector companies were still repairing their balance sheets. By public sector, Nageswaran meant the central and state governments and state-owned enterprises.

For the current financial year (FY23), Finance Minister Nirmala Sitharaman announced a capex outlay of Rs 7.5 trillion, a 35.4 per cent jump from the budget estimates of FY22. This included Rs 1 trillion in long-term, interest-free loans to states to meet their capex needs.

The idea was that this will encourage states to increase their investment into projects, as capital expenditure has a higher multiplier effect than administrative or scheme expenditure.

However, an analysis by Business Standard of the ten biggest Indian states (by gross state domestic product) shows that most of them have underspent in FY23 so far year-on-year.

Data available on the website of the Comptroller & Auditor General (CAG) of India shows that for the first eight months of FY23 (April-November, till when data is currently available), seven of the ten biggest states did not spend more in capex, either in absolute terms or as a percentage of full-year capex targets set in their respective budgets.

This was in spite of additional support by the Centre and sustained messaging by the central policymakers that states need to focus on capex.



Economists say this has happened for a number of reasons, including the fact that states do not have the capacity to ramp up capex spending quickly, and that with crucial state elections in 2022 and 2023, many state administrations chose to focus on scheme and subsidy spending.

“I think it is very largely a capacity issue. States do not have the setup, in order to undertake large capital expenditure at will. They are slow in uplifting capex,” said D K Srivastava, Chief Policy Advisor at EY India.

As the chart shows, out of the ten big states, only three – Gujarat, Karnataka, and West Bengal – have spent more in April-November FY23 in absolute terms as well as a percentage of full-year target, compared to the same period last year.

Srivastava said that there may be also a sense in many of the states that it is the central government which will take the lead on capex and large infrastructure projects.

One state, Uttar Pradesh, disbursed more capex in absolute terms so far this year, compared to last year, but as a percentage of the full-year target, the spending was unchanged. Maharashtra spent more compared with April-November FY22, but came in lower as a percentage of budget estimates.

Five states – Tamil Nadu, Rajasthan, Andhra Pradesh, Telangana, and Madhya Pradesh – actually spent less in absolute terms as well as percentage terms compared to the same period last year. The difference was especially stark in the case of Andhra Pradesh and Telangana, as the chart shows.

“States are not spending on capex, neither are they thinking in terms of ramping up capex spend. They may be going slow on it. Some of the states may already be in election mode, and hence the focus may be more on spending on welfare benefits and subsidy schemes,” said Soumya Kanti Ghosh, Chief Economic Advisor, State Bank of India.

“The issue is that capital expenditure has a higher multiplier effect, but with a long gestation period, while spending on populist schemes has a very short gestation period in terms of traction across voters,” Ghosh said.

Some of the bigger states due for elections in 2023 and 2024 include Karnataka, Rajasthan, Madhya Pradesh, Andhra Pradesh, Telangana, and Maharashtra.