Economy: Governments` capex remains in slow lane by Kotak Institutional Equities
Governments’ capex remains in slow lane
Center and states’ 11MFY25 fiscal accounts continued to highlight weakness in capital expenditure. Revenue expenditure, while muted, was broadly in line with FY2025RE. Based on year-end spending trend, center and states had a tall task to meet expenditure targets in March. States have historically fallen short of budgeted spending. Given budgeted targets, governments’ capital expenditure growth is likely to remain relatively muted in FY2026.
Corporate tax collection continues to be weak; overall receipts steady
Total receipts in 11MFY25 were 13.4% higher yoy (81% of FY2025RE) (see Exhibit 1). Direct taxes in 11MFY25 were 13.3% higher yoy (81% of FY2025RE), with corporate tax growth of 1.9% and personal income tax growth of 23%. However, direct tax data till March 16 indicated 7.1% growth in corporate tax (in line with FY2025RE) and 17.5% growth in personal income tax (slightly lower than FY2025RE). Indirect tax collection growth was in line with FY2025RE at 8%. Net tax revenues grew 9% in 11MFY25. States’ own tax growth was at 9.1% in 11MFY25 and only 82% of FY2025BE (based on 22 states’ data) (see Exhibit 2).
General government capex growth remained weak
Capital expenditure has been the weakest link in FY2025 fiscal accounts of the general government (center and states). For 11MFY25, we estimate general government capex growth at only (-)1% (adjusted for center’s loan to states for capex) (see Exhibit 3). Center’s capex growth was 0.8% in 11MFY25 with support from states’ loans, roads and railways. Most of the weakness stemmed from defense, telecommunication, economic affairs and steel (see Exhibit 1). States’ capex growth was at 0.2% in 11MFY25 and 60% of FY2025BE (based on data from 22 states). Adjusting for the center’s loans, states’ capex growth would have been (-)4.5%.
Revenue expenditure muted for both center and states
Center’s revenue expenditure growth at 4.7% was slightly below FY2025RE target of 5.8% (83% of FY2025RE in 11MFY25). Among the larger spending areas, revenue expenditure (relative to FY2025RE) was relatively muted for drinking water and sanitation and transfers to states, while a healthy pace was seen in health, agriculture, subsidies, defense and rural development (see Exhibit 4). States’ 11MFY25 revenue expenditure has been at 11.2% and at just 80% of FY2025BE (see Exhibit 2).
Tall task of meeting FY2025 capex targets; FY2026 likely to remain in slow lane
Given 11MFY25 data, center’s receipts seem to be much more achievable (see Exhibit 5) while the spending required in March to meet FY2025 targets has been much higher than usual, especially for states (see Exhibits 6-7). The year-end improvement in liquidity indicates that government spending had improved along with RBI’s OMO and FX swaps (see Exhibit 8). However, it is unlikely that states would have met the spending targets and center could have slipped marginally on capex. FY2026 capex growth target for the center is modest, while for states these are optimistic and likely to be missed, as usual (see Exhibits 9-11).
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