Capital outlay for state governments is projected to increase to 2.9 per cent of gross domestic product (GDP) in 2023-2024 from 2.1 per cent of GDP in 2020-2021, the Reserve Bank of India in its Financial Stability Report.

Capital expenditure by the government is playing a big role in driving the growth of the Indian economy, the report stated.

According to the apex bank, the expansion of capital expenditure is aided by the ‘Scheme for Special Assistance to States for Capital Investment’ provided by the central government under which financial assistance was provided to the states in the form of 50-year interest-free loans.

“Overall, the RECO ratio of States is budgeted to improve to 5 per cent in 2023-24 (PA) from 6.0 per cent in the previous year,” RBI mentioned in the report. The rise in capital expenditure by both the centre and states is expected to improve potential growth and crowd in private capital.

States’ gross fiscal deficit (GFD) stood at 2.8 per cent in 2022-23, lower than the budget estimates of 3.2 per cent. A sharp decline in revenue deficits has been the primary driver of this fiscal consolidation. The RBI has budgeted a GFD-GDP ratio of 3.1 per cent, well within the Centre’s limit of 3.5 per cent in 2023-2024.

The report also highlighted the marked improvement in the quality of expenditure. As per RBI projection, capital outlay excluding loans and advances is projected to increase to 2.8 per cent of GDP in 2023-24 from 1.6 per cent in 2020-21.