Call it the Covid-19 impact or rising bill for maintaining the government, the total capital spending of Centre and 14 Indian states (accounting for 63 per cent of total state budget) has fallen off the cliff in the April-June quarter, and has grown by a mere 2 per cent level over last year.

As per the monthly accounts available for 14 states, while their total spending in Q1 FY21 stood at 18.4 per cent of budget estimate (BE), similar to that in previous years, the spending growth was entirely led by a 9.7 per cent YoY increase in revenue spending.

On the other hand, states' capital spending (including loans and advances) contracted a strong 43.5 per cent YoY last quarter, marking the fourth contraction in the past five quarters.

What this shows is that state governments spent more to maintain its size and clearing debt during pandemic rather than spending on capital activities that prop up economic activities, generates jobs and help propel the growth momentum.

"Somehow states have to get more proactive and focused in relation to their spending. If additional liquidity is available through various schemes being announced by the Centre to kick start economic activities and take the economy back on growth momentum, states need to see it is used more productively," said an analyst tracking the state finances asking not to be named.

According to an analysis done by Motilal Oswal Institutional Equities, while states was their interest payments growing 24 per cent YoY in the first quarter period, growth in salary and costs (based on 12 states) was modest at 2.3 per cent, and pensions grew just 0.6 per cent YoY.

When we combine the finances of the central government and 14 states, the total receipt of the government declined 39.4 per cent YoY, while total spending grew by a modest 7.1 per cent YoY in 1QFY21 (after adjusting for grants from the Centre to the 14 states).

"Overall, we learn that while capital spending by the Centre (including loans & advances) grew 40 per cent YoY last quarter, the governments' total capital spending (including 14 states) grew just 2 per cent YoY in 1QFY21," the brokerage report said.

What is worse that despite Centre relaxing fiscal deficit limits for states by up to 2 percentage point of GSDP (Gross State Domestic Product) depending on numerous conditions, the excess liquidity would largely go into meeting their lower receipts. This could limit their ability to spend more in the coming months, raising doubts regarding the strength of recovery.

The states' fiscal deficit has already reached 37 per cent of BE in 1QFY21 (more than double the average of 16 per cent in previous three years). The total receipts of the states declined 18.2 per cent YoY in 1QFY21.

Details related to the receipts suggest the states' total tax receipts (including Centre's devolution) fell 32.1 per cent YoY and non-tax revenue receipts fell 27 per cent YoY in the first quarter of FY21. Conversely, grants from the Centre grew by 56 per cent during the quarter.

Within the states' own taxes, the collection of stamp duties and registration charges shrank 58 per cent in 1QFY21.