Capital outlay by states is expected to grow 10-12 per cent to around ₹8.5 trillion in 2026-27 (FY27), supported by higher central support and greater fiscal headroom, with urban infrastructure likely to drive spending in the second half of the financial year, according to Crisil Ratings.
“Our analysis of 18 states, which account for 90 per cent of India’s gross state domestic product (GSDP), indicates capital outlay growth will outpace the 8.6 per cent recorded last fiscal,” Crisil said in a research note.
“The states are expected to achieve 84 per cent of their aggregate budgeted capital outlay, up from 82 per cent last fiscal and broadly in line with the five-year average of 85 per cent through last fiscal,” it added.
The improved outlook for capital expenditure (capex) by states is underpinned by an increase in allocation under the Centre’s Special Assistance to States for Capital Investment (SASCI) scheme to ₹2 trillion this financial year from ₹1.54 trillion in the revised estimate (RE) for FY26.
The Centre introduced the scheme in 2021, under which it provides 50-year interest-free loans to state governments for capex. The scheme was part of the central government’s post-Covid strategy to revive the economy through high public capex aimed at creating a multiplier effect on private investment.
Early spending trends also point to an improvement. States’ capital outlay grew around 8.8 per cent year-on-year in the first five months of FY27, even as disbursements under SASCI had reached only around 25 per cent of the budgeted allocation by September. Spending momentum is expected to strengthen in the second half as the tied portion of the scheme’s allocation is released.
“Higher SASCI support gives states additional room to invest without drawing on their normal borrowing limits. The scheme has demonstrated strong utilisation, which should help translate this funding into capital spending,” said Anuj Sethi, senior director, Crisil Ratings.
Loans under the Centre’s SASCI are over and above the states’ borrowing limit of 3.5 per cent of GSDP, which includes 0.5 per cent of GSDP linked to power sector reforms.
Fiscal flexibility is also expected to improve as revenue receipts grow faster than revenue expenditure, supported by goods and services tax (GST) collections and tax devolution from the Centre, the release said. Crisil has projected states’ revenue receipts to outpace revenue expenditure by around 75 basis points, which is likely to keep the absolute revenue deficit broadly stable.
Urban infrastructure is expected to lead the increase in states’ capex, with spending on water supply, sanitation, housing and urban development projected to grow at a high double-digit rate, supported by higher state allocations and funding under central schemes.
Transport, primarily roads and bridges, accounts for around a fourth of aggregate state capital outlay and is expected to remain the largest spending segment, with growth projected at a high single-digit rate. In contrast, irrigation spending is expected to grow at a low single-digit rate, owing to lower budget allocations by some key states and a high base last year.
However, timely fulfilment of conditions linked to SASCI and efficient release and utilisation of funds will be critical to achieving the spending projections. Crisil also flagged the willingness of states to borrow amid rising interest rates, as well as the risk of weaker revenue growth and higher relief and welfare expenditure due to deficient monsoon conditions or persistent inflationary pressures.
