States' Capital Outlay Likely to Rise to Rs 8.5 Lakh Crore in FY27: Crisil Report

New Delhi, Nov 9 (KNN) Capital outlay by states is expected to rise to around Rs 8.5 lakh crore in the current fiscal, supported by higher central assistance and greater fiscal flexibility, with urban infrastructure likely to drive spending growth, according to a report by Crisil Ratings.

The report highlighted that an analysis of 18 states, accounting for around 90 per cent of India's gross state domestic product (GSDP), estimates that these states will achieve 84 per cent of their aggregate budgeted capital outlay, compared with 82 per cent last fiscal and a five-year average of 85 per cent. Growth is also expected to exceed the 8.6 per cent recorded last year.

The outlook is supported by a 33 per cent increase in the Special Assistance to States for Capital Investment (SASCI) allocation to Rs 2 lakh crore, stronger nominal GSDP growth and a broadly stable absolute revenue deficit.

Introduced in FY21, SASCI provides states with 50-year interest-free loans outside their normal borrowing limits. 

Anuj Sethi, Senior Director, Crisil Ratings, said, “Higher SASCI support gives states additional room to invest without drawing on their normal borrowing limits. The scheme has demonstrated strong utilisation, which should help translate this funding into capital spending.” 

“Fiscal flexibility is also expected to improve as revenue receipts grow faster than revenue expenditure, supported by GST collections and tax devolution from the Centre, helping keep the absolute revenue deficit broadly stable,” Sethi added.

Revenue receipts are projected to exceed revenue expenditure growth by around 75 basis points. Capital outlay rose 8.8 per cent year-on-year during the first five months of FY27, while disbursements under the SASCI scheme stood at only about 25 per cent of the allocation by September. Spending is expected to pick up in the second half as tied funds are released.

Urban Infrastructure to Lead Spending

Transport, mainly roads and bridges, accounts for around one-fourth of state capital outlay, while water supply, sanitation, housing and urban development (WSS-H-UD) and irrigation contribute nearly one-fifth each.

Crisil Ratings Director Aditya Jhaver said, “Urban infrastructure will drive capital spending, with the WSS-H-UD segment expected to post high double-digit growth, supported by higher state allocations and funding under key centrally sponsored schemes.” 

“Transport will remain the largest spending segment, although growth is expected at a high single-digit rate as states continue investing in road maintenance and connectivity,” Jhaver added.

Irrigation spending, however, is expected to grow in the low single digits due to lower allocations by some major states and a high base.

Execution and Fiscal Risks

Crisil said the spending outlook depends on timely fulfilment of SASCI-linked conditions and efficient fund release and utilisation. States' willingness to borrow amid rising interest rates will also require monitoring.

Weaker revenue growth or higher relief and welfare spending due to deficient monsoons or persistent inflation could further constrain capital expenditure.

(KNN Bureau)