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NEW DELHI — The capex of key state governments is projected to rise by 13 per cent in the current fiscal (FY25) to INR 6.5 lakh crore, according to a report on Wednesday.
However, compared to the FY25 budget estimate (BE) of INR 7.2 lakh crore, the latest projection falls short following a dull start to the capex in the initial months of this fiscal as well as the anticipated undershooting in states’ revenues, according to credit agency ICRA.
The agency has projected the combined capital spending of 13 major state governments to expand by 13 per cent.
According to Aditi Nayar, Chief Economist at ICRA, with a 13.5 per cent contraction in capital spending during the first four months of FY25 and heavy rainfall in some of the states in Q2, capex by the states appears set for a back-ended surge in the second half of this fiscal.
“We forecast a double-digit 12.6 per cent expansion in the combined capex of sample states in FY2025; nevertheless, this will be lower than the actual 19.6 per cent increase seen in FY24 provisional actuals (PA),” she mentioned.
The rating agency assesses Gujarat, Karnataka, Maharashtra and Tamil Nadu to have adequate fiscal space for meeting their budgeted capex in FY25 and anticipates some undershooting by the remaining sample states.
The government had enhanced the allocation for the scheme for special assistance to states for capital investments to INR 1.5 lakh crore in July 2024 from INR 1.1 lakh crore in February.
ICRA forecasts the states’ own tax revenues, the key driver of their revenues, to grow by a healthy 11.5 per cent in FY25.
“After some tepidness in discretionary spending in Q1 FY2025, we are hopeful of a revival of rural demand in H2 FY2025 aided by a healthy kharif harvest,” said Nayar.
The state GST, excise duty and S&R collections are set to expand by 11-13 per cent this fiscal. Sales tax collections are projected to grow by a modest 5.5 per cent, after a modest performance in FY2024.
The tax devolution in FY2025 is set to be in line with the amount indicated by the government in its Union Budget.
Last week, to enable states to boost development and capital spending, the Centre released tax devolution of INR 1,78,173 crore to state governments, as against the normal monthly devolution of INR 89,086.50 crore. It included one advance instalment, in addition to the regular instalment due in October.