States to Prioritize Capex Despite Fiscal Tightening, Growth to Moderate

This would translate into a capex of about 2.3 per cent-2.4 per cent of Gross State Domestic Product (GSDP), supported by interest-free loans from the Centre, the report from CareEdge Ratings said.

The report cited rising revenue‑expenditure commitments and moderation in revenue growth leading to a tighter fiscal headroom and ease in capex growth.

The ratings agency expected the revenue expenditure to remain high as states absorb higher social spending and face potential external pressures from higher energy and commodity costs.

Revenue receipts of states are projected to grow 6.2 per cent in FY26 and 7.9 per cent in FY27, trailing nominal GSDP, due to moderation in grants and some sensitivity to external factors that may weigh on overall revenue realisations.

Further, the pace of growth in central transfers is expected to ease, constrained by fiscal pressures at the Centre arising from elevated subsidy requirements amid geopolitical developments in West Asia.

"While capex will remain a priority, its growth may moderate amid tightening fiscal headroom, leading to a modest uptick in fiscal deficits and debt," the report said.

"As a result, the revenue deficit is projected to widen from 0.8 per cent of GSDP in FY25 to around 1.2 per cent by FY27. Maintaining fiscal discipline will therefore remain critical as states balance welfare commitments with the need to sustain capital investment," said Prasanna Krishnan, Associate Director, CareEdge Ratings.

The report noted that Uttar Pradesh, Madhya Pradesh, Gujarat, Maharashtra and Telangana have continued to prioritise capital expenditure despite moderate revenue growth, reflecting a sustained focus on infrastructure creation.

"Meaningful traction in monetization of state infra projects and bolstering of investor confidence for Public Private Partnership (PPP) projects in states are critical for funding higher capital outlay", said Maulesh Desai, Director, CareEdge Ratings.

- IANS