Assembly Elections 2023: Huge rise in capex, but all 5 states may not meet targets

Over the last few years, the Centre has encouraged states to invest more as their capital expenditure plays a crucial role in India’s growth trajectory.

In the immediate run-up to elections, the focus is almost always on the amounts being promised by the competing political parties on the so-called freebies. Falling in their shadow are asset-creating spending, or capital expenditure, whose benefits are more difficult to explain to the electorate.

Fortunately, all the five states going to polls next month – Mizoram, Chhattisgarh, Madhya Pradesh, Rajasthan, and Telangana – have seen sharp increases in capital expenditure this year.

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In fact, according to data for the first five months of 2023-24 from the Comptroller and Auditor General of India, Mizoram has seen a 443 percent year-on-year increase in capex, the highest among any state in India. Undoubtedly, a small base works to its benefit, as its capex has increased to Rs 237 crore from just Rs 44 crore in April-August 2022.

Capex push

But even the larger poll-bound states have stepped their foot on the pedal. Take Telangana for instance, whose capex has more than tripled from the first five months of 2022-23 to Rs 18,144 crore this year. Even Madhya Pradesh, the state with the lowest year-on-year increase in capex this year among the five holding their assembly elections in November, has registered a growth of 44 percent.

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Of course, state governments are not acting on their own, with the Centre having shifted its focus to capex early on in the pandemic. But even until last year, it was felt that state governments weren't doing enough investment.

"For the Centre, the current thrust provided for capex needs to be continued while also focusing on fiscal consolidation. For the States, it is imperative that they necessarily increase their capex due to its centrality in stimulating higher economic growth," economists from the Reserve Bank of India's (RBI) Department of Economic and Policy Research had said in December 2022.

But why is state capex so important? Surely, the Centre's record Rs 10-lakh-crore target for 2023-24 should be enough. It's not, actually.

Adjusted for defence, state capex makes up about 70 percent of the combined capital outlay at the Centre and state levels. As such, their role in India's growth trajectory is instrumental. If anything, state capex is even more important than the Centre's, with the capex multiplier for the former found to be higher than that of the latter.

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It is no surprise that the Centre has looked to encourage states to increase their capex, enhancing the size of its scheme to provide long-term, interest-free loans to states to Rs 1.3 lakh crore this year, up 30 percent from last year. Among the poll-bound states, Madhya Pradesh has been the clear leader in utilising this scheme for capital projects, with the central government having already released Rs 5,065 crore as of July 25.

In contrast, Mizoram and Chhattisgarh had not received any funds at all under this special scheme, although they had received approvals worth Rs 399 crore and Rs 3,195 crore, respectively.

Distant targets

The work, however, is far from over.

Like the Centre, states have set lofty capex targets for this year, with the five states in question here having a total budget estimate of Rs 1.58 lakh crore for 2023-24. And while the year-on-year growth rates are impressive, the journey is rather long, with only Madhya Pradesh and Telangana on track to meet their budget estimates.

To be on schedule, 42 percent of the full-year capex target should be met in the first five months of the year. At 49 percent, Telangana is ahead of schedule, while Madhya Pradesh is bang on target with 42 percent. The other three states, however, are lagging dangerously behind: Rajasthan at 27 percent, Chhattisgarh at 19 percent, and Mizoram at just 14 percent.

Admittedly, capex cannot be spread evenly across the 12 months of the year; there will be months when a huge amount is spent given the size of some infrastructure projects. But given that this is a special year with the state machinery remaining pre-occupied with the elections, and some states likely to see a change in the government, meeting the annual target may not be straightforward.