States Prioritize Infra Spending Despite Tightening Fiscal Squeeze: New Report Reveals Capex Trajectory

States Prioritize Infra Spending Despite Tightening Fiscal Squeeze: New Report Reveals Capex Trajectory​

New Delhi: Indian states are set to maintain a steadfast focus on public infrastructure investment, even as they face increasingly constrained fiscal resources. A report released by CareEdge Ratings suggests that while capital expenditure (capex) remains a core state priority, its growth momentum is expected to moderate.

The ratings agency projects that capital expenditure growth will settle around 8–10 per cent in FY27. This level of investment would translate to approximately 2.3 per cent to 2.4 per cent of the Gross State Domestic Product (GSDP), supported in part by interest-free loans from the Centre.

Fiscal Headroom and Expenditure Trends​

CareEdge Ratings noted that rising revenue and expenditure commitments, coupled with moderate revenue growth, are creating a tighter fiscal environment. This reality suggests a natural moderation in the rate of capex growth across various states.

The report highlighted that revenue expenditure is expected to remain high. This sustained spending level is attributed to states absorbing increased social spending obligations and facing external pressure from higher commodity and energy costs.

Meanwhile, revenue receipts are projected to grow at a rate of 6.2 per cent in FY26, accelerating to 7.9 per cent in FY27. However, this growth trails the nominal GSDP, largely due to moderated grants and external factors that may weigh on overall revenue realization.

Central Transfers and Deficit Concerns​

Adding to the fiscal complexity, the pace of central transfers is expected to ease. This constraint is primarily due to fiscal pressures at the Centre, which are arising from elevated subsidy requirements amid geopolitical developments in West Asia.

Prasanna Krishnan, Associate Director at CareEdge Ratings, cautioned that although capex will remain a priority, its growth might moderate amid tightening fiscal headroom. He noted that this trend could lead to a modest uptick in fiscal deficits and overall state debt.

The report further pointed out that the revenue deficit is projected to widen from 0.8 per cent of GSDP in FY25 to approximately 1.2 per cent by FY27. Maintaining robust fiscal discipline is therefore emphasized as critical, especially as states attempt to balance welfare commitments with the crucial need for sustaining capital investments.

Key States and Funding Requirements​

Despite the moderation in projected revenue growth, several states have shown an unwavering focus on infrastructure development. Uttar Pradesh, Madhya Pradesh, Gujarat, Maharashtra, and Telangana were specifically cited for continuing to prioritize capital expenditure.

For states to fund a higher capital outlay and meet their infrastructure goals, expert guidance suggests critical structural mechanisms must be employed. Maulesh Desai, Director at CareEdge Ratings, stressed that meaningful traction in the monetization of existing state infra projects is vital.

Furthermore, bolstering investor confidence for Public Private Partnership (PPP) projects within the states remains paramount for funding the ambitious capex roadmap.