Indian states are expected to prioritize public investment, with a slight slowdown in capital expenditure growth to approximately 8–10% in FY27, according to a report by CareEdge Ratings. This adjustment would result in a capex of about 2.3%–2.4% of Gross State Domestic Product (GSDP), supported by interest-free loans from the Centre. The report highlights increasing revenue-expenditure commitments and a decline in revenue growth, leading to tighter fiscal space and a reduction in capex growth.
The ratings agency anticipates that revenue expenditure will remain elevated as states absorb higher social spending and encounter potential external pressures from increased energy and commodity costs. State revenue receipts are forecasted to increase by 6.2% in FY26 and 7.9% in FY27, trailing nominal GSDP due to a moderation in grants and sensitivity to external factors affecting overall revenue realizations. Additionally, the growth rate of central transfers is expected to slow down, constrained by fiscal challenges at the Centre due to heightened subsidy needs amidst geopolitical developments in West Asia.
“While capital expenditure will stay a priority, its growth might ease due to limited fiscal space, resulting in a slight rise in fiscal deficits and debt,” noted the report. It further projects an expansion of the revenue deficit from 0.8% of GSDP in FY25 to around 1.2% by FY27. The report emphasizes the importance of maintaining fiscal discipline as states balance welfare commitments with the imperative to sustain capital investments, as stated by Prasanna Krishnan, Associate Director at CareEdge Ratings.
The report also observed that states like Uttar Pradesh, Madhya Pradesh, Gujarat, Maharashtra, and Telangana have continued to emphasize capital expenditure despite modest revenue growth, showcasing a sustained emphasis on infrastructure development. Maulesh Desai, Director at CareEdge Ratings, highlighted the significance of enhancing investor confidence for Public Private Partnership (PPP) projects in states and achieving substantial progress in monetizing state infrastructure projects to fund higher capital outlay.
