“State-led capital expenditure is a key driver to sustain India’s growth momentum.” Examine the trends in states’ capital expenditure and also elucidate the challenges in sustaining this momentum. (10M, 150 Words)

State-led capital expenditure (capex) spending on infrastructure such as roads, irrigation, power, health, and urban development has become a critical pillar of India’s post-pandemic recovery. Unlike revenue expenditure, capex enhances long-term productive capacity and crowds in private investment. Given that states account for nearly two-thirds of total public capex, their fiscal strategy significantly shapes India’s growth trajectory.

Trends in State’s capital expenditure:

1.    Strong Capex expansion:

• Combined capex and loans & advances of 28 states doubled to ₹8.4 trillion, growing at a CAGR of 18.5%.
• In 2025–26 (Apr–Dec), capex grew 25.7% in Q3, signalling revival after a weak first half.

2.   Central support as catalyst:

• GST compensation loans (₹2.6 trillion in FY21–22) provided fiscal breathing space.
• 50-year interest-free capex loans worth ₹3.7 trillion (FY21–FY25) incentivized asset creation.

3.   Reform incentives:

• Additional borrowing of 0.5–1.1% of GSDP allowed under Union relaxations and 15th Finance Commission.
• Power sector reform-linked borrowing enabled states to access ₹1.3 trillion extra (FY22–FY25).

4.   Divergence across states:

• States like Maharashtra and Gujarat maintained capex-to-GSDP ratios above 3.5%.
• States with higher Tax-to-GSDP ratios of more than 8% such as Karnataka and Tamil Nadu financed welfare without breaching the 3% fiscal deficit norm.

Challenges in sustaining this momentum:

1.    Revenue slowdown:

• Combined revenues of 18 major states grew only 7.7% (Apr – Dec 2025 – 26) vs 22% budgeted.
• State GST growth moderated to 3.3%, further constraining fiscal space.

2.   Rising welfare commitments:

• Cash transfers to women surged from ₹120 billion (FY23) to ₹1.5 trillion (FY26), a 1,150% increase.
• High revenue expenditure leaves less than 20% of receipts for discretionary development.

3.   Debt burden: States like Punjab and Rajasthan (Debt-to-GSDP of more than 30%) spend over 20% of revenue receipts on interest payments.

4.   End of capex loan window: Possible phasing out of ₹1.3 trillion annual capex support may create a funding vacuum. With near ending of GST compensation, revenue uncertainty persists.

5.   Execution bottlenecks: Cost overruns in irrigation and road projects average 15–20%, reducing value-for-money.

Reforms needed:

1. Institutionalising capex: Institutionalize capex support as a formula-based mechanism under the 16th Finance Commission.
2. Performance-linked borrowing flexibility: Shift toward performance-linked borrowing limits (3–4% of GSDP) based on debt sustainability.
3. Rationalising revenue expenditure: Expand non-tax revenues and rationalize welfare with sunset clauses.
4. Strengthening project execution capacity: Improve project identification, monitoring, and implementation efficiency through universal adoption of PFMS and real-time expenditure tracking.

Conclusion:

Robust and well-managed state capital expenditure is central to sustaining India’s growth momentum. The 16th Finance Commission’s recommendations will be pivotal in shaping this trajectory.

‘+1’ Value Addition:

• States account for nearly 60–65% of total public capital expenditure in India – making their fiscal stance decisive for overall growth.
• RBI estimates capital expenditure has a multiplier of 2.45, significantly higher than revenue expenditure (0.99).
• States received ₹2.6 trillion as GST compensation loans (FY21–22), which prevented fiscal contraction during the pandemic.
• Centre extended ₹3.7 trillion (FY21–FY25) in 50-year interest-free loans, directly incentivising infrastructure creation.

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