The good news is, lower-income states are catching up, Pg8

Key Highlights:

• Lower-income states like Uttar Pradesh, Rajasthan, and Bihar have shown higher relative growth post-pandemic (FY19-FY25).
• This convergence is linked to increased public capital expenditure (capex) by these states in infrastructure.
• Central government's capex loans to states programme has supported state revenues and investment.
• Declining central tax revenues and increased state cash transfer schemes pose risks to sustaining capex.
• The Centre could expand support to states through increased capex loans to maintain growth momentum.

Detailed Insights:

• Pre-pandemic (FY13-FY19) data showed divergence, with lower-income states growing slower than higher-income states.
• State capex improves physical infrastructure and signals reform, attracting private-sector investment and driving growth.
• Strong state revenues are crucial for public capex, especially for laggard states, with central transfers playing a key role.
• Weakening central tax revenues and expansive state cash transfer schemes could strain state finances and capex.
• The Centre's capex loans to states programme, with outlays rising from Rs 1.20 trillion in FY21 to Rs 1.5 trillion in FY26, is crucial for sustaining state investments.
• States should leverage central deregulation and eased labor laws, like the Industrial Relations Code, to attract FDI and integrate into global supply chains.
• Emerging states with wage advantages can attract investment in labor-intensive sectors like textiles and footwear.

Key Concepts Involved:

• Public Capital Expenditure (Capex): Government spending on infrastructure and assets to boost economic activity.
• Fiscal Deficit: The difference between a government's total revenue and its total expenditure.
• Foreign Direct Investment (FDI): Investment made by a firm or individual in one country into business interests located in another country.