The percentage of states’ combined capital expenditure in the Gross Domestic Product (GDP) may experience a slight increase from 2.5% in FY23 to 2.8% in FY24, according to India Ratings.

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The 15th Finance Commission suggested that states could have a fiscal deficit of 4% of Gross State Domestic Product (GSDP) in FY23, with 0.5% of it being linked to power sector reforms. Despite this, an evaluation of provisional data for 26 states by the Comptroller and Auditor General revealed that during April-January FY23, these states together managed to accomplish 52% of the budgeted capital expenditure for FY23, leaving limited fiscal space for additional CAPEX.

According to the report, during April-January FY23, only a few states including Kerala, Karnataka, Gujarat, Himachal Pradesh, Madhya Pradesh, Bihar, and Odisha have spent 60% to 74% of their FY23 budgeted estimate (BE) on capital expenditures.

The states have borrowed substantially less than the budgeted gross market borrowings of approximately Rs. 9 trillion for FY23, which suggests that they have not taken full advantage of the additional fiscal space available for capital expenditure.

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The inclusion of off-budget borrowings by state government entities in FY22 and FY23 as part of the states’ net borrowing ceiling for FY23 by the central government could have reduced the market borrowings of states. The rating agency forecasts that the gross market borrowings of states will be Rs. 8 trillion in FY24, with net market borrowings projected to be Rs. 5.1 trillion. Consequently, the rating agency has changed its outlook on the financial condition of Indian states from “improving” to “neutral” for FY24.