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Credit rating agency ICRA has projected the combined capital spending of a sample of 13 major state governments to expand by 13% to Rs 6.5 trillion in FY25. However, this entails a miss, relative to the FY25 Budget Estimate (BE) of Rs 7.2 trillion, following a dull start to the capex in the initial months of this fiscal as well as the anticipated undershooting in states’ revenues. 

The rating agency foresees a modest slippage in the combined revenue and fiscal deficits of the 13 states in FY25 to Rs 2.2 trillion and Rs 8.8 trillion, respectively, from Rs 1.9 trillion and Rs 8.5 trillion, respectively, in the BE. Moreover, ICRA expects the combined leverage (debt+ guarantees) level of the sample set to inch up to 30% of GSDP in FY25 from 29.2% of GSDP in FY24, with continuing variation across the states. Although the Government of India (GoI) had enhanced the allocation for the Scheme for Special Assistance to States for Capital Investments to Rs 1.5 trillion in July 2024 from Rs 1.1 trillion in Feb 2024, its utilisation to the full extent in FY2025 appears somewhat unlikely, following its sluggish offtake in the early months.

ICRA estimates the state GST, excise duty and S&R collections to expand by 11-13% in FY25. However, sales tax collections are projected to grow by a modest 5.5% in FY25, after a modest performance in FY24. Additionally, ICRA expects the tax devolution in FY25 to be in line with the amount indicated by the GoI in its Union Budget published in July 2024. After the double tranche of tax devolution extended recently, the amount of funds remaining to be released relative to the FY25 BE for tax devolution entails a 13% YoY contraction in the balance part of this fiscal, which the states should take into consideration while planning their borrowings for the rest of the year.