The highly skewed monthly distribution of capital outlay by States is a cause of concern, according to RBI’s report on State Finances.

“During the last five years, on average, states were able to spend only a third of their full-year spending during H1 (April-September), with more than a quarter of the total spending being undertaken in the last month — March. This suggests a residual approach to spending,” said the report.

The capital outlay of the States registered a year-on-year growth of 0.9 per cent in April-October 2022.

This low capital outlay partly reflects the tendency to back-load expenditure in the latter half of the year. The expenditure pattern of states also reveals that they do not always expand the full amount of their budgeted expenditure by the year end, even with sufficient fiscal headroom,” per the report.

At a disaggregated level, Uttar Pradesh, Maharashtra, Madhya Pradesh, Karnataka and Tamil Nadu together account for more than 40 per cent of the combined capital outlay undertaken by all states.

States such as Uttar Pradesh, Odisha, Assam and Jharkhand have a relatively higher share of capital outlays, in comparison to the size of their economies, per the report.

Furthermore, the States’ quality of expenditure, measured in terms of RECO (Revenue Expenditure to Capital Outlay) ratio, appears to be inversely related to their level of indebtedness.

The report noted that outlays on social services and physical infrastructure can enhance productivity; hence, states must mainstream capital planning rather than treating them as residuals and first stops for cutbacks in order to meet budgetary targets.

The data available from the Comptroller and Auditor General of India (CAG) indicate that State governments’ capital expenditure has grown at a modest rate of 7 per cent in H1: 2022-23 against 50 per cent growth recorded by the Centre, it said.

Hence, states need to step up investment in H2:2022-23 to meet their budgeted target for the year.

“Their efforts would be supported by buoyant tax and non-tax revenues, advance installations of tax devolution from the Center and front-loading of post-devolution revenue deficit grants,” said the report.

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