States Struggle with Balancing Fiscal Space in Wake of Rising Revenue Deficits

Crisil Ratings predicts state capital outlay will grow to 6% this financial year, below last year's 7% and the decadal average of 11%, as revenue deficits rise. Major spending areas include water, sanitation, housing, and irrigation. Ability to balance social and capital spend is critical for credit outlook.

Crisil Ratings projects a growth in state capital outlay from four per cent to six per cent this financial year, reaching nearly Rs 7.5 lakh crore. This estimation comes amid shrinking revenue flexibility, reflected in the falling capital outlay compared to the previous year's seven per cent and a decadal average of 11 per cent.

Key expenditures are in water supply, sanitation, housing, urban development, and irrigation, underpinning the capital expenditure. The report highlights that the leading 18 states will account for a predominant 94 per cent of this capital outlay, indicating concentrated investment activity across regions.

The rise in revenue deficits stems from slowing GST growth post-rationalization, reduced central devolution, and the impact of easing inflation on nominal GDP growth. Revenue expenditures are projected to grow by seven to nine per cent, with significant allocations towards social welfare schemes further straining fiscal space and borrowing capacity, limiting capital expenditure scope, as cited by Anuj Sethi, a Senior Director at Crisil Ratings.

(With inputs from agencies.)