States’ importance in total government CAPEX has grown in the past decade
India’s large and complex government structure warrants an understanding of the role of states in total government spending. Industrial and healthcare companies serving the public sector should note the state-level dynamics of governments, their spending patterns and priorities, election cycles, and the health of government finances while prioritizing their India business.
Overview
- About 60% of total government capital expenditure in India comes from states, up from 45% in 2014. Aside from states’ share of CAPEX, overall capital spending in India has also grown by an average 14% over the past eight years.
- States spent about 23% of total CAPEX on infrastructure projects and 6–8% on healthcare, urban, and rural development.
Our View
States are likely to continue focusing on capital spending over the next few years. Some of this will be supported by the central government’s interest-free CAPEX loans to states, totaling US$ 15.6 billion in FY 2023–2024. While state CAPEX tends to lag the targets met by the central government, overall spending has increased year over year since 2014.
Large states such as Uttar Pradesh, Maharashtra, Madhya Pradesh, Karnataka, and Tamil Nadu make up more than 40% of total state capital spending. However, state governments—unlike the central government—tend to undershoot their capital expenditure budgets by a large margin (roughly by 20–30%). States that have tended to underspend against CAPEX budgets are Andhra Pradesh, Bihar, Chhattisgarh, and Kerala. This is generally the case if a state favors spending on subsidies and pensions over capital, or their fiscal position forces them to be more conservative on spending. Of the major states, Gujarat, Maharashtra, Jharkhand, and Odisha are in the best position to meet their spending targets due to their low debt and deficit levels. Aside from capital spending trends, firms should also account for general investor interest across different states. Maharashtra, Karnataka, Gujarat, and Delhi remain the top destinations for FDI equity inflow, far above other states and territories.
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