The hope that states will revive capex is fast fading. Data on capital expenditure by the governments of seven major states that have announced their budgets so far shows that they have cut down capex dramatically, just like the central government.
The total aggregate capex of seven states is estimated to expand at 3% in FY17 against 36% in FY16, Ambit Capital Research said in a note dated 21 March 2016.
These states include Tamil Nadu, Uttar Pradesh, Gujarat, Rajasthan, Kerala, Madhya Pradesh and Bihar, and account for slightly over two-fifths of the country’s gross domestic product. The central government in the Union budget for FY17 cut the capex growth to 4% compared with 21% in FY16.
States which are headed for elections have budgeted for higher capex—Kerala has increased the capex by 45% for FY17 compared with 43% growth in FY16, while Tamil Nadu has budgeted for increasing capex by 21% for FY17 compared with 4% decline in FY16.
On the other hand, states like Rajasthan and Bihar have cut capex after increasing it dramatically in FY16 ahead of state elections. Others states like Rajasthan and Uttar Pradesh seem to be resorting to fiscal discipline because they have the highest level of state electricity board debt restructuring.
Ambit Research’s note adds: “Given that large parts of the private sector appear mired in a balance sheet recession and the government appears uninterested in pump-priming capex, we urge investors to stay away from cyclicals".