Kolkata: Capital outlay of states is expected to grow from four per cent to six per cent in the current financial year touching approximately Rs 7.5 lakh crore, Crisil Ratings said in its report on Friday.

This would be lower than seven per cent in the last financial year and well below the decadal average of 11 per cent as rising revenue deficits are limiting financial flexibility, the report said. Water supply and sanitation, including housing and urban development and irrigation, will continue to be the main drivers of the capital expenditure, the report said. The top 18 states will account for 94 per cent of capital outlay of the states.

According to the report, rising revenue deficit of the states are due to slow pace of growth due to moderation in GST rates post rationalisation, slowing devolution from the Centre and lower nominal GDP growth driven by easing inflation.

On the other hand, revenue expenditure is set to grow sharply by seven per cent to nine per cent, driven by committed spending and increased allocation towards social welfare schemes, the report said.

Senior director of Crisil Ratings Anuj Sethi said higher increase in revenue expenditure will widen the revenue deficit of the states and will lower the fiscal space and borrowing capacity for carrying out capital expenditure.

According to the report, government capital expenditure has a higher multiplier effect on economic output. Government capital expenditure crowds out private investments, induces an increase in overall expenditure and aids economic growth.

Given the limited ability to raise resources by the states, the ability to balance social expenditure with capital outlay will be key factor in assessing their credit outlook, the report said.