Capital expenditure by states is expected to grow at a slower pace of about 8–10% in FY27, compared with an estimated 17% in FY26, as fiscal pressures rise and global uncertainties weigh on finances, according to a report by CareEdge Ratings. 

The report released on Monday said states will continue to prioritise public investment, but tighter fiscal space on higher revenue spending and slower revenue growth will limit their ability to sustain high capex growth. Capital outlay is projected at 2.3–2.4% of Gross State Domestic Product (GSDP), or ₹8.32–8.46 lakh crore in FY27. 

Revenue growth under pressure 

Geopolitical tensions in West Asia are expected to add to the pressure by influencing energy prices, which could affect both revenues and expenditure. 

Over FY26 and FY27, revenue receipts are projected to grow at a moderate pace of 6.2% and 7.9%, respectively, lagging nominal GSDP growth. This is mainly due to a moderation in grants and sensitivity to external factors. At the same time, central transfers may slow as the Centre faces its own fiscal constraints because of higher subsidy requirements. 

“State revenue growth is expected to remain moderate through FY26 and FY27, primarily due to a tapering of grants from the Centre, with external headwinds further weighing on overall receipts in FY27,” Prasanna Krishnan, Associate Director, CareEdge Ratings, said. 

Rising expenditure and fiscal strain 

CareEdge noted that revenue expenditure will remain elevated, driven by continued social sector spending, welfare measures, and higher costs linked to energy and commodities. This could widen revenue deficits and reduce fiscal flexibility for states. 

Meanwhile, revenue expenditure is likely to stay elevated, driven by continued social sector spending, a higher state share under select schemes, and additional inflationary pressures from elevated commodity and fuel prices amid geopolitical developments in West Asia which may also push subsidy outgo at the state level. As a result, the revenue deficit is projected to widen from 0.8% of GSDP in FY25 to around 1.2% by FY27. Maintaining fiscal discipline will therefore remain critical as states balance welfare commitments with the need to sustain capital investment, CareEdge said. 

Despite these challenges, several large states continue to focus on infrastructure spending. However, with fiscal deficits expected to rise from 3.2% of GSDP in FY25 to about 3.5% in FY27, debt levels may also increase. 

“With fiscal space becoming tighter due to rising revenue expenditure commitments and moderation in revenue growth, state capex growth is expected to moderate to around 8-10% in FY27 from 17% growth estimated in FY26. Therefore, meaningful traction in monetisation of state infra projects and bolstering of investor confidence for Public Private Partnership (PPP) projects in states are critical for funding higher capital outlay,” Maulesh Desai, Director, CareEdge Ratings, said.