Capex cut by states may dampen overall growth, opine experts

by Nidhi Bhati

State governments’ move to compress capital expenditure (capex), in order to maintain a fiscal balance, may dampen overall growth, as per a report in Bloomberg. States account for about 60 per cent of total government expenditure on infrastructure and asset creation. However, a continuous decline in tax revenue and the cost of combating the Covid-19 pandemic has left most states cash-strapped. Also, unlike the central government, states do not have the flexibility to borrow more to maintain spending as that would lead to a fiscal deficit blowout. As per the Reserve Bank of India estimates, every one rupee spent by the central government will lead to an increase in GDP by Rs.3.14, while similar spending by states will boost output by Rs.2. However, data shows that capex of 17 states contracted by 23.5 per cent y-o-y during April-December 2020. As per experts, this could lead to a shortfall of around Rs.1.8 trillion in the current financial year’s spending target. This gap would further wipe out Rs.3.6 trillion from economic output, where as additional spending by the central government in the current year would add just Rs.848 billion despite a higher multiplier effect.