State Capex Needs To Rise By 40% In H2FY25 To Meet Targets: Report

Based on the budget estimates (BE) for the financial year 2025 (FY25) and the trends in the first half of the current fiscal (H1FY25), the state capital expenditure (capex) needs to rise by 40 per cent in the second half of FY25 (H2FY25) to meet the set target. A report by Icra stated that amid the compression in capex, the fiscal deficit of 15 states stood at Rs 3.5 trillion in H1FY25, equivalent to 42 per cent of the BE.

The combined revenue deficit of 15 states stood at Rs 1.4 trillion during H1FY25, equivalent to 89 per cent of FY25 BE. The combined revenue receipts of these states rose by 7.3 per cent in H1FY25, sharply trailing the 20 per cent expansion indicated in the BE by a wide margin. As per the report, this was led by lower-than-budgeted growth in the state’s own tax revenues (SOTR) reflecting moderation in consumer demand amid elevated inflation, elections and climate-related disruptions in the economic activity in H1FY25.

On a positive note, the tax devolution increased by 19.3 per cent in H1FY25, exceeding the 9.3 per cent rise expected in the estimates. The combined revenue expenditure rose by 9.5 per cent in the first half of the current fiscal, weaker than the 19 per cent expansion included in the BE, as stated in the Icra report.

“While we expect a pick-up in the growth of the revenue receipts in H2FY2025 led by SOTR, the required rate of 30 per cent seems challenging, led by various domestic and global factors as well as our assessment of continuing contraction in grants. Additionally, notwithstanding the highly back-ended capex in FY2025, we expect it to undershoot the levels indicated in FY2025BE,” stated the report.

The report noted that the combined revenue receipts and revenue expenditure of the 15 states are required to expand by around 30 per cent and 26 per cent, respectively in the second half of the current fiscal to achieve the targets.