India's states are set to accelerate their infrastructure spending to about Rs 8.5 lakh crore this fiscal, driven by higher central support and greater fiscal headroom, according to a Crisil Ratings report released on Friday, November 6. The findings are based on an analysis of 18 states that together account for about 90 per cent of India's gross state domestic product (GSDP).

Source: ANI / Crisil Ratings

The projected growth of 10-12 per cent would outpace the roughly 8.6 per cent rise in state capital outlay recorded last fiscal. Crisil expects states to achieve about 84 per cent of their aggregate budgeted capital outlay this year, up from about 82 per cent last fiscal and broadly in line with the five-year average of about 85 per cent. Revenue receipts are expected to grow about 0.75 percentage points faster than revenue expenditure, supported by GST collections and tax devolution from the Centre, keeping the absolute revenue deficit broadly stable.

Source: UrbanAcres / Crisil Ratings

The single biggest support is the Special Assistance to States for Capital Investment (SASCI) scheme, introduced in fiscal 2021, which gives states 50-year interest-free loans outside their normal borrowing limits. Its allocation has risen 33 per cent to Rs 2 lakh crore this fiscal. “Higher SASCI support gives states additional room to invest without drawing on their normal borrowing limits,” said Anuj Sethi, Senior Director at Crisil Ratings, adding that the scheme “has demonstrated strong utilisation, which should help translate this funding into capital spending.”

The year has started more slowly than the target implies: state capital outlay grew about 8.8 per cent year-on-year in the first five months of the fiscal, while SASCI disbursements had reached only about 25 per cent of the budgeted allocation by September 2026, largely through the untied component. Crisil expects momentum to pick up in the second half, when tied allocations are typically released.

By sector, transport — mainly roads and bridges — remains the largest component at around one-fourth of total outlay, growing at a high single-digit rate. Water supply, sanitation, housing and urban development (WSS-H-UD) accounts for nearly one-fifth and is expected to post high double-digit growth. “Urban infrastructure will drive capital spending,” said Aditya Jhaver, Director at Crisil Ratings. Irrigation, also nearly one-fifth of outlay, is expected to grow only in low single digits, held back by lower allocations from a few key states and a high base last year.

Crisil cautioned that the outlook depends on states meeting SASCI-linked conditions on time, releasing and using funds efficiently, and remaining willing to borrow as interest rates rise. Weaker revenue growth, or higher relief and welfare spending after a deficient monsoon or persistent inflation, could squeeze the fiscal space the forecast relies on.