As many as 12 of the 17 states in the Reserve Bank of India’s non-special category grew faster than the 6.7% pace the national economy clocked in fiscal 2018, CRISIL said in its report titled ‘States of growth 2.0’ released today.

A dozen states also grew faster compared with the preceding five years, even as the national economy saw growth slip from 6.9%.

But that’s where the good news ends, because growth hasn’t been equitable.

Low-income states have not sustained high growth long enough to meaningfully bridge the per capita income gap with the high-income states. In fact, the chasm is widening.

Moreover, growth has not quite been conducive to job creation in a majority of states. That’s because 11 out of 17 states (for which data is available) have recorded lower than all-India growth in ‘employment-intensive’ sectors such as manufacturing, construction and trade, hotels transport and communication services.

On the fiscal front, most states veered off the Fiscal Responsibility and Budget Management Act (FRBM) line.

“But this is the bird’s-eye view,” says Dharmakirti Joshi, Chief Economist, CRISIL Ltd, “Dig deeper into expenditure patterns and there is silver lining. With little fiscal legroom for the Centre, states are now the new engines of government spending.”

Indeed, states appear to have taken the baton from the Centre in terms of spending – especially capital expenditure – in recent years. This has become all the more relevant after the 14th Finance Commission increased allocation of funds to states and gave leeway to prioritise spending as per need. Nearly two-fifths of the capex in the economy is being incurred by states, up from about one-third prior to fiscal 2015.

At the overall level, although Uttar Pradesh, Karnataka and Bihar were the big spenders, Rajasthan, Jharkhand, Uttar Pradesh and Telangana topped the list of states that spent the most out of their budget on capex.

Yet most states are not spending as they ought to, and neglecting crucial areas such as health and education.

Says Dipti Deshpande, Senior Economist, CRISIL Ltd, “States must also be wary of their debt profiles. While the FRBM Act had helped states recover their fiscal health considerably, recent trends show they are slipping. Debt ratios have risen in many states – with the assimilation of Ujwal Discom Assurance Yojana (UDAY), farm loan waivers, and Pay Commission hikes.”

The debt ratio was over 30% in Punjab, Rajasthan and Kerala, while Chhattisgarh, Maharashtra and Karnataka managed to keep it relatively low.

For most states, an increase in the primary deficit (which captures the current fiscal stance of the government) was the major cause of the rise in the debt ratio. Therefore, states must focus on improving their primary account balance, which would require relentless efforts to shore up tax revenue.

CRISIL’s previous ‘States of growth’ report, brought out in January 2018, focussed on GDP growth, inflation and fiscal health of states between fiscals 2013 and 2017. The latest version focusses on how macroeconomic performance evolved in fiscal 2018, and offers insights on expenditure patterns, quality of spending, and fiscal sustainability. States are also benchmarked against national trends in key metrics, which have yielded interesting contrasts.