States' capital outlay to accelerate to 10-12% on Centre support in FY27, urban infra to lead: Crisil

States' capital expenditure is projected to rise 10-12% to around Rs 8.5 lakh crore in FY27, driven by higher central assistance and greater fiscal flexibility, according to a Crisil Ratings report. Increased allocation under the SASCI scheme is expected to support infrastructure spending, particularly urban development, roads and bridges.

Mumbai: States' capital expenditure is expected to increase 10-12 per cent to about Rs 8.5 lakh crore in FY27, driven by higher central assistance and improved fiscal flexibility, a report said on Friday.

The report estimates that they will achieve around 84 per cent of their aggregate budgeted capital outlay, compared with 82 per cent in the previous fiscal year.

Capital outlay growth is expected to surpass the 8.6 per cent recorded last fiscal year, supported by a 33 per cent increase in allocation under the Special Assistance to States for Capital Investment (SASCI) scheme to Rs 2 lakh crore.

The scheme, introduced in FY21, provides states with 50-year interest-free loans over and above their normal borrowing limits.

"Higher SASCI support gives states additional room to invest without drawing on their normal borrowing limits. The scheme has demonstrated strong utilisation, which should help translate this funding into capital spending," said Anuj Sethi, Senior Director at Crisil Ratings.

Revenue receipts are expected to grow around 0.75 per cent faster than revenue expenditure, supported by GST collections and tax devolution from the Centre, which will help keeping the absolute revenue deficit broadly stable.

Capital outlay grew 8.8 per cent year-on-year in the first five months of the fiscal year, even as SASCI disbursements had reached only around 25 per cent of the budgeted allocation by September 2026. Spending is expected to gather pace in the second half as tied allocations are released.

Urban infrastructure, particularly water supply, sanitation, housing and urban development, is expected to register high double-digit growth, supported by higher state allocations and central schemes, it said.

"Urban infrastructure will drive capital spending, with the WSS-H-UD segment expected to post high double-digit growth," said Aditya Jhaver, Director, Crisil Ratings.

Transport, primarily roads and bridges, will remain the largest component, accounting for around one-fourth of aggregate capital outlay, with growth expected in the high single digits. Irrigation spending, however, is likely to grow at a low single-digit rate due to lower allocations by some states and a high base.

Crisil said timely fulfilment of SASCI-linked conditions and efficient fund utilisation would be critical to achieving the spending targets. Higher borrowing costs, weaker revenue growth and increased welfare expenditure could also constrain states' capital spending.

The projections assume nominal GSDP growth of about 13 per cent in the current fiscal, against 8.9 per cent in the previous fiscal.