States may see a massive cut in capital expenditure in FY21 due to the revenue impact of the pandemic, the Reserve Bank of India said in its annual study of state finances released on Tuesday.
The report “State Finances: A Study of Budgets of 2020-21” found that states drastically cut their capex by Rs 1.26 trillion, or nearly 0.6 per cent of the country’s gross domestic product (GDP), in the previous fiscal year 2019-20. This is the sharpest cut in at least two decades, the report shows, and it happened before the pandemic hit the economy.
The cut in capex in FY20 was so big that the rate of capital spending to GDP dropped from the 2018-19 levels for all states, the report said. The prevailing economic situation may force states to do the same this year, the report noted.
“States have a tendency to cut their capital expenditure by almost 0.5 per cent of GDP, on average, to meet fiscal deficit targets. A similar tendency relative to Budget estimates can be expected in 2020-21, particularly since states have not been able to start much capex because of lockdown (in Q1) and monsoons (in Q2),” it said.
A quick analysis of 10 major states shows that they have sharply cut capex by 35 per cent in the first five months (April-August) of the current year.
Apart from lockdown and the monsoon, capex was also hit due to sudden changes in the prioritisation of spending. The data shows that in April-June (Q1) of FY21, revenue spending rose 12 per cent when revenue receipts were down by 21 per cent.
This links to one more risk factor for capital spending this year: Rising debt to GSDP (gross state domestic product) ratio of states. To keep revenue expenditure at budgeted levels when revenue receipts are falling, states are borrowing more from the market this year.
“For 19 states, debt-GSDP ratio is expected to exceed 25 per cent in 2020-21 which may force curtailment of capital expenditure,” the report said.
Further, the loans from the Centre to partially make good shortfall in Goods and Services Tax compensation will add to interest outgo of states, putting a new pressure point on state finances.
To drive capex, the Centre recently announced a special interest free 50-year loan to states for capital expenditure of Rs 12,000 crore to be spent till March 2021.
“It represents a small fraction of budgeted capex of Rs 6.5 trillion,” the RBI