Are states really investing more? Central capex aid partly replaces their own spending, shows SBI report

States’ rising capital expenditure may not fully reflect fresh investments, as a portion of central assistance is substituting their own spending, according to a report by SBI Research.

The report, based on an analysis of the Centre’s Scheme for Special Assistance to States for Capital Expenditure (SASCI), flagged that while the programme has boosted overall capex levels, it has also led to partial “crowding out” of states’ own investments.

“A ₹1 increase in SASCI leads to a decline of roughly ₹0.34 in own-funded capex of states suggesting that states substitute a portion of SASCI for spending they would otherwise have financed themselves,” the report said.

SBI noted that the substitution effect is even sharper for fiscally stressed states.

“The impact is more pronounced for revenue deficit states which show a decline in own capex by ₹0.55 as compared to ₹0.34 for all states,” it added.

The findings raise questions about the true extent of incremental investment by states, even as headline capital expenditure numbers have improved in recent years.

According to the report, the capex multiplier of central assistance remains below unity, indicating only partial additionality.

“A ₹1 increase in SASCI is associated with only about ₹0.67 increase in total capital expenditure, implying that the scheme is only partially additional,” it said.

The analysis suggests that nearly one-third of central transfers may be offset by reductions in states’ own spending, dampening the overall multiplier effect of public investment.

SBI emphasised that the scheme has still played a key role in supporting state finances and maintaining capital expenditure levels.

Over the past five years, the Centre has allocated about ₹4.5 lakh crore under SASCI, helping states raise capex as a share of GDP.

However, utilisation patterns vary significantly across states, with higher-debt states showing weaker absorption capacity, partly due to pressure from revenue expenditure.

The report also highlighted structural factors influencing spending behaviour, including rising cash transfer schemes and fiscal constraints, which may incentivise states to rely more on central funds.

SBI found that tied funds, linked to specific sectors or reforms, lead to stronger investment outcomes and minimal substitution, compared to untied funds which are more fungible.

“Tied SASCI is markedly more additional than untied SASCI… whereas untied SASCI appears substantially more fungible and is associated with significant crowding out of own-funded capex,” the report said.

The report concluded that for states to fully realise the growth benefits of higher capital spending, they must increase their own contribution alongside central assistance, rather than replacing it.